Company Cars - Buying or Leasing a Car in a Corporation
If you are considering leasing or buying a vehicle in your corporation, there are several tax implications that you will want to understand from the onset.
Business vs. Personal Use
When a vehicle is leased through a corporation, the company has the benefit of deducting the business-use portion of the lease payments and other vehicle operating costs on its tax return.
Oftentimes, there is also a personal use component to the vehicle usage as well. Any personal use results in a benefit to you that is either added to an employee’s T4 slip or, in the case of a shareholder using the vehicle, the benefit can be allocated to their shareholder loan account.
Taxable Benefits - Automobile Used by an Employee
If a vehicle is made available to an employee for personal use, then the employee is considered to have received a taxable benefit from their employer. In the eyes of the CRA, even driving to and from work with a company car is considered personal use!
The automobile taxable benefit is included in employment income on the employee’s annual T4 slip and is subject to payroll deductions including income tax, CPP and EI. There are two elements to the automobile taxable benefit: the standby charge and operating benefit.
Standby Charge Benefit
The standby charge benefit recognizes that the employee is receiving a benefit by having an automobile made available to them during the year.
Generally speaking, the standby charge is calculated as:
2% per month of the cost of the automobile, or
⅔ of the lease costs calculated with reference to the number of days the automobile is made available to the employee in the year.
Note that this standby charge may be reduced if more than 50% of the vehicles mileage in the year is for business use and less that 20,004 km per year are driven for personal use.
Operating Cost Benefit
The operating cost recognizes that the employer has paid for all of the automobile’s operating costs throughout the year, even though it has been made available for personal use to an employee.
This taxable benefit is also included in the employee’s income for the year, less any reimbursements made by the employee to the employer for the vehicle use.
The operating cost benefit is calculated as the number of personal kilometres driven in the year multiplied by the specified per kilometer rate ( $0.27/km for 2021).
If the employee uses the automobile primarily (at least 50%) for work related purposes, a reduced operating benefit may be calculated as 50% of the standby charge less any reimbursements.
CRA Automobile Benefits Calculator
The Canada Revenue Agency has an online automobile benefits calculator that you can use to estimate the taxable benefits resulting from a company owned vehicle made available to a shareholder or employee.
You simply need to enter the vehicle information (cost/lease payment), the length of time it was made available to the employee in the year as well as the mileage and the calculator computes the expected taxable benefit for the individual.
Corporate Tax Deductions
If the corporation decides to lease an automobile, it will be able to deduct the monthly lease payments on its corporate tax return up to a limit of $800/month +GST/HST.
If the vehicle is purchased, the first $30,000 of the automobile’s cost can be depreciated on the corporate tax return under the capital cost allowance program.
In addition, the corporation can also deduct the operating expenses incurred to run your car such as:
licensing and registration costs
fuel and oil
repairs and maintenance costs
You can also deduct the full amount of parking fees related to your business activities. More information on claiming motor vehicle expenses can be found here if you're interested.
The two key things to remember about deducting vehicle expenses is that they have to be reasonable and receipts have to be kept on file.
Anytime vehicle costs are being claimed for tax purposes, it's always best practice to track your mileage. In the event of a CRA review, documentation could be provided to support the business-use of the vehicle and related tax deduction.
There are a bunch of great apps out there to help you track your mileage - below are a few of the more popular ones:
If you are interested in a zero-emission vehicle, there are a few incentives out there right now that are worth checking out.
If you lease an eligible vehicle, you can qualify for a federal rebate of up to $5,000. As well, if you buy one of the eligible vehicles, you can get a 100% write-off in the year of purchase (compared to 30% for a gas-powered vehicle).
It's important to note that you can get the rebate or the tax write-off, and not both. More information on this new program can be found here.