What is a company car?

Many businesses have company cars that they own or lease for employee use. These vehicles are typically for business purposes, but many employers also allow them for personal use. Some company cars are take-home vehicles, allowing employees to commute to the office conveniently. However, some company cars stay in the company compound or parking lot until an employee requires it for a delivery, site visit, an appointment or meeting, or any business activity that takes them away from the office. Who gets the benefit of a company car largely depends on the industry and type of business providing the vehicle.

What to consider before providing a company car

Before issuing company vehicles to employees, employers must understand the differences between business and personal use. These differences will help you make the right decisions when purchasing auto insurance, qualifying for tax deductions, and including taxable benefits for personal use. According to the Canada Revenue Agency (CRA), personal use constitutes driving a company vehicle from the office to the employee’s home and vice versa. Personal use also means driving the company car anywhere that isn’t business-related. For example, stopping for lunch, coffee, or at the grocery store. Examples of driving a company car for business use include:

• delivering goods, personnel, tools, and products
• meeting with partners or clients (including going for meals)
• visiting job sites
• out-of-town travel

Company cars and taxes

The Canadian government offers tax benefits for owning or leasing vehicles for business use. You can decrease your taxable income by deducting the costs under the CCA (Capital Cost Allowance) program. The CCA has a maximum allowable deduction for business-owned vehicles of $34,000 before taxes for fossil-fuel autos and $59,000 for zero-emission vehicles if purchased after January 1, 2022. Before January 1, 2022, the maximum deduction is $30,000 and $54,000, respectively. If you entered a lease after January 1, 2022, you can deduct $900 per month; otherwise, it’s $800. You can also deduct other operating costs, such as:

• insurance
• registration
• parking fees
• repairs
• maintenance
• oil and gas
• $300 per month maximum for the interest rate of company car loans

There are two components of the automobile tax benefit for employees and shareholders who drive company vehicles for personal use—standby charge and operating cost.

Standby charge

The standby charge relates to the vehicle’s worth. It’s chargeable anytime the car is available for use, meaning when stakeholders or employees have access to the keys and control of the vehicle. Even if they don’t use the car, the standby charge stays in effect until they return the keys and give up control. The standby charge consists of 2% of the cost of the vehicle for every 30 days the car is available to the driver. For example, if the automobile is available to the driver for 365 days of the year and is worth $25,000, the standby calculation looks like this:

$25,000 x 2% x 12 = $6,000

The driver will qualify for the Reduced Standby Charge if the personal use remains under 1667 kms per month, with over 50% of the kilometres for business purposes. A variable in the Reduced Standby Charge calculation is the BRR (Benefit Reduction Ratio). Calculate the BRR by dividing the personal kilometres by the number of 30-day periods available multiplied by 1,667. For example, if your driver travelled 25,000 kms throughout the year and 6,000 were for personal use, using the previous model of 365 days of availability, the calculation looks like this:

BRR is 6,000 / (12 x 1,667) = .2999

$25,000 x .02 x 12 x 0.2999 = $1,799.40

The original standby charge was $6,000, but the reduced standby charge drops it to only $1,799.40. As you can see, keeping accurate records pays off.

Operating costs benefit

Operating costs refer to the benefits the driver receives since the employer pays for vehicle repairs, maintenance, fuel, insurance, and other expenses related to both personal and business use. The CRA states that the operating cost benefit should be the lesser of half of the reduced standby charge or .28 cents per personal kilometre. Using the above example:

 $1,799.40 x 50% = $899.70

or

6,000 kms x 0.28 = 1,680

You would use $899.70 for the operating cost benefit plus the reduced standby charge of $1,799.40, equalling $2,699.10 on an aggregate T4.

Tracking personal and business use of company cars

Tracking fuel, kilometres, and other vehicle-related expenses is essential for business and personal tax benefits and a CRA requirement. Besides recording the vehicle’s odometer reading at the start and end of the year, you must keep a detailed logbook of every business trip. The logbook records must include:

• date
• destination
• number of kilometres
• purpose of the trip

Pros and cons of providing company cars

The following pros and cons can help you decide whether to provide your employees with a company car.

Pros

The advantages of providing a company vehicle include:

• Free advertising: Most company vehicles have a business name, logo, phone number, and email address that promotes brand recognition and decreases advertising expenses.

• Greater control: You have more say in what your employees can or can’t do when driving a company car.

• The economy of scale: The more vehicles in your fleet, the better the discounts for leases or purchases of new cars, insurance rates, maintenance, out-fitting, graphic design, and repairs.

• Employee reward: Improves motivation, engagement, and productivity.

• Specialized vehicles ensure safety: Supplying specialized vehicles for transporting equipment, personnel, or products mitigates risk, damage, and loss and doesn’t rely on employee vehicles that may not be up to standards.

Cons

The disadvantages of proving a company vehicle include:

• Upfront expenditure: You can incur considerable costs upfront if purchasing company vehicles, which can be especially hard on small businesses.

• Higher risk: You’ll require more liability insurance. You risk lawsuits and high legal bills in case of a serious accident involving a company vehicle.

• Influence on cash flow: You may incur high maintenance and repair or replacement fees if the vehicle is stolen or totalled in an accident.

• Idle fleet costs: When a company car sits idle, it costs you money as you must still pay fixed costs like insurance, the lease or loan payment, and maintenance.

• Cyber risks: Depending on your business and the type of vehicles in your fleet, there may be risks with data breaches on computerized equipment that could leak customer or corporate data.

How does a car allowance work?

Employers typically pay their employees a monthly, quarterly, or annual car allowance to cover vehicle-related expenses rather than supplying them with a company vehicle. The employee decides if they want to purchase or lease a new car or maintain the upkeep of their current vehicle. There are pros and cons when providing a car allowance.

Pros

The pros of providing a car allowance to employees and stakeholders include:

• Easy to set up: Use CRA’s guidelines to set up allowances, then add or remove them when necessary.

• Saves time: Skip the hassle of loans, leases, insurance, repairs, and maintenance.

• No mileage or business expenses tracking: The CRA doesn’t require tracking unless you use the mileage reimbursement scheme.

• Frees up admin staff for more important tasks Eliminate sorting and filing vehicle-related items and setting up appointments for repairs and maintenance.

Cons

The cons of providing a car allowance to employees and stakeholders include:

• Setting allowances can be challenging: Setting car allowances for individual employees may be difficult depending on your industry and business finances. Some employees may require more mileage than others, and others may not need a work vehicle.
• Tax implications for your business and employees: You can prevent tax liabilities by reimbursing mileage if the employee maintains a proper mileage logbook per CRA’s guidelines. The national average is $0.68 per kilometre for the first 5,000 and $0.62 per additional kilometre.

While issuing company cars and car allowances both has pros and cons, the decision comes down to the type of business you operate and your preferences. Company cars offer benefits you can’t put a direct dollar amount to, such as boosting staff morale, free advertising and brand recognition, safety, and a significant recruiting edge. Car allowances save precious time and relieve the burden of vehicle ownership. Both are tax deductible if the car allowance you provide is within CRA’s standards and your employees keep track of business-related usage and mileage.