April 2002 volume 6 issue 1 

by Jonathan C. Warren, CA, Audit Senior

For years, many business owners, managers and employees have used vehicles for commuting to work, travelling to meetings, visiting customers and a host of other purposes. Whether the vehicle is owned personally, or by the company, the tax rules governing its use can be somewhat daunting.

The three most common cases are:

1. A corporation owns a vehicle and provides it to an employee for business and personal use.
2. The proprietor of an unincorporated business uses a personal vehicle for business purposes.
3. A corporation reimburses an employee who uses a personally owned vehicle for business purposes.

In this article, we examine the first case, for the benefit of those clients and readers to whom this applies. In the next issue of this newsletter, we will look at the next two cases.

What Expenses are Deductible?
According to the Canada Customs and Revenue Agency, business travel is defined as any reasonable travelling to and from a customer’s place of business, or reasonable travelling done in the performance of the business. A meeting at a customer’s office is included in the business kilometers, as is a trip to the office supply store to buy paper and pens for the business.

The following tax considerations apply.
Any expenses incurred to operate the vehicle can be deducted BY THE CORPORATION including gas, oil and maintenance as well as insurance, license and registration fees. Leasing costs, Capital Cost Allowance (CCA) and interest costs can also be deducted.
There are special rules with respect to the allowed depreciable cost of the vehicle. A vehicle purchased after December 31, 2000 and costing less than $30,000 is considered a class 10 capital asset and eligible for a 30% CCA rate. (There is a half rate rule for the year of purchase.)
If the vehicle costs exceed $30,000, there may be restrictions on the deductibility of CCA due to legislation designed to reduce deductions when an expensive luxury vehicle is purchased for business reasons. Further, the maximum allowable interest deduction for amounts borrowed to purchase an automobile remains at $300 a month for loans on vehicles acquired after 2001.
The limit on deductible leasing costs is $800 per month (plus applicable federal and provincial sales taxes) for leases signed after 2001. A separate restriction prorates deductible lease costs where the value of the vehicle exceeds the $30,000 capital cost ceiling.

CASE # 1: (A corporation owns a vehicle and provides it to an employee for business and personal use)
The federal government has enacted special rules to remove the benefit to the employee of using a vehicle personally that is owned by a corporation, in the form of a taxable benefit charge. The taxable benefit included on an employee’s T4 will consist of three calculations:

1. Stand-by Charge
   
2. Operating Benefit
   
3. GST calculated on the standby charge excluding PST amounts
   

Stand-by Charge
If the vehicle is not used in the business at least 90% of the time, the stand-by charge is equal to 2% of the vehicle’s cost (excluding GST but including PST) for each month the vehicle was available for personal use. A special reduction formula is available to reduce the stand-by charge if the employee uses the vehicle more than 90% of the time for business. While the corporation may be limited in the cost amount it can place in its CCA pool, the stand-by charge asseused to the employee is based on the actual cost of the vehicle and is not limited by this upper boundary.

In the case of a leased vehicle, the standby charge is equal to two-thirds of the lease costs of the vehicle (including maintenance and repairs included in the lease).

Operating Benefit
In arriving at the total taxable benefit reported on an employee’s T4, the company will have to add an operating expenses benefit to the stand-by charge, if the company pays operating costs such as gas, oil, maintenance, etc. To calculate this benefit, the number of personal-use kilometers in a year is multiplied by 16 cents, or 13 cents if the company is principally in the business of the selling or leasing of automobiles. If the vehicle is used at least 50% of the time for business, then 50% of the standby charge may be included as the operating benefit in place of the $0.16 per km charge. This is only beneficial if this amount is less than the $0.16 per km otherwise calculated.

GST Charge
This benefit is calculated simply as the GST benefit on the stand-by charge. The standby charge is calculated in the same manner as above, but excluding all PST amounts. This number is then multiplied by 7%.

Reducing the Amount of the taxable benefit
There are a couple of other ways to reduce the taxable benefit if the company owns the vehicle.

Keep track of when the vehicle is not available for personal use, for example, when the employee is out of town and does not have access to the car.

Compare the charge for a leased vehicle with the charge of a purchased vehicle. Two-thirds of the lease costs may be less expensive than 24% of the purchase costs.

Conclusion
The tax rules regarding the benefits and business use of vehicles are complex. Your Wilkinson Client Services Partner can help you make the best financial and tax decisions in this area. Please call us for further information.