December 16, 2015
By Bob Boser, Collins Barrow
When staff travel on company business there are different tax consequences for the company and the employee, depending on who owns the vehicle.
From the December 2015 print edition, p. 29
Engineering projects come to life out in the field, which naturally requires consulting engineers to travel frequently to construction sites and client meetings.
To facilitate work-related automobile travel, it’s not uncommon for companies to provide their employees with a vehicle or reimburse them for the use of their own. When considering which option is best, it’s important to understand the different income tax consequences for both employers and employees.
Owned by the company
A company that owns or leases an automobile is responsible for the associated ownership and operating costs (which are all tax-deductible for the company). The company can provide the vehicle to an employee to perform his or her employment duties, and often the employee will also use it for personal purposes, including transportation between work and home.
To ensure employees do not receive a tax-free benefit in such cases, an extensive set of rules is used to calculate the benefit and add it to the individual’s employment income (the employee must detail business and personal travel in a log book):
– The operating cost benefit. This charge is calculated per personal kilometre driven in the year (the 2015 figure is $0.27).
– The standby charge. If the automobile is owned by the employer, the charge is 2% of the vehicle’s original cost for each month the automobile is made available to the employee. For leased vehicles, the charge is two-thirds the cost of the monthly lease. The standby charge is reduced if the employee’s personal use amounts to less than 20,004 kilometres in a year.
– The total benefit calculated from the automobile use. This is considered pensionable earnings for the Canada Pension Plan (CPP), but not insurable earnings for Employment Insurance (EI) purposes. So, necessary withholding and remittances for income tax and CPP are to be calculated and included in the employee’s income.
Consider these tips to reduce the standby charge and minimize tax consequences for the employee:
– Reduce the availability of the vehicle. The employee leaves the automobile at the business premises on weekends and when he or she is away on vacation.
– Minimize personal driving. Encourage employees to use their own vehicle if possible for personal driving. Note that if the employee makes business visits on the way to or from work, what would otherwise be personal travel converts to business travel.
– Sale and leaseback. The standby charge is based on a vehicle’s original cost. If a vehicle is several years old, a sale and leaseback arrangement will allow the standby charge to be based on the automobile’s current, lower value.
– Lease terms. Select a longer term for leased automobiles to reduce the lease cost and standby charge.
When the employee owns the car
Companies can opt to pay employees to use their own vehicles for work-related purposes, with different reimbursement options.
– Per kilometre payment. Repayment from the company to the employee is based solely on business kilometres driven and considered a tax-free allowance for the employee if it does not exceed prescribed rates that the Canada Revenue Agency (CRA) sets annually. The 2015 rates for travel within a province are $0.55 per kilometre for the first 5,000 kilometres driven in the calendar year, and $0.49 for each additional kilometre. (In the Territories, the rates are $0.04 higher.) If additional expenses such as parking or supplementary insurance are reimbursed, they are also part of the tax-free allowance.
– Alternative payment. The CRA permits payments to an employee based on a monthly estimate of kilometres to be driven, with a year-end adjustment once the total distances are known. A payment that is not based solely on business kilometres (such as a flat monthly allowance) is tax-deductible for the employer company. However, the amount is taxable to the employee and added to their income for the year. Payments are considered pensionable earnings for CPP and insurable earnings for EI.
When payments are added to an employee’s income, they may be able to claim a deduction for the business-related automobile expenses as a portion of their overall vehicle expenses (business-related kilometres divided by total kilometres) by obtaining Form T2200 from their employer. To support this, the employee must log their business and personal travel, and keep copies of expense receipts.
Here are some tips to reduce tax consequences for the employee:
– Maximize business driving. Employees can count business visits on the way to or from work as business travel. They should use a secondary vehicle for personal purposes as much as possible.
– Vehicle purchase loans. If vehicle payments are taxable and expenses are deductible, use a line of credit for the vehicle purchase and pay down other debts (e.g. mortgage) first to maximize tax deductions. cce
Bob Boser, CPA, CA, leads the tax practice at Collins Barrow Red Deer LLP in Alberta. He specializes in providing tax services to small and medium-sized clients. E-mail firstname.lastname@example.org.