| Minimizing
a company car benefit
If employees are provided with
a company car, they will be
assessed a taxable benefit,
known as a standby charge, for
having use of the vehicle during
the year. If the vehicle is
owned by employer, the formula
for calculating the standby
charge is the cost of the vehicle
times 2% per month the vehicle
was available to the employee.
If the vehicle is leased, the
formula is two thirds of the
monthly lease charge.
There are a number of tax planning
opportunities to reduce this
benefit, but the onus is on
the employee to maintain accurate
details of personal km driven.
If the vehicle is driven at
least 50% for business purposes,
the standby charge is reduced
by the following formula for
company owned vehicles:
Cost
of Vehicle x
24% x
Personal km Driven / 20,000
This reduction is the principal
tax break available to employees
with a company supplied vehicle
that drive very few personal
kilometers. If the personal
kilometers driven are zero,
there is no taxable benefit
assessed to the employee. The
50% rule is arbitrary and it
is very important that accurate
personal driving details are
maintained.
Consider the following
example:
| Cost
of vehicle |
$30,000 |
| Total
km driven |
24,000 |
Personal km driven by individual
A |
12,480 (52% business)
|
| Personal
km driven by individual
B |
11,520
(48% business) |
| Marginal
tax rate of both individuals |
40% |
| |
|
Standby charge
calculation for individual A
| Standby
charge $30,000 x 24% = |
$7,200 |
| Standby
charge reduction $ 7,200
x 12,480/20,000 = |
$4,492.80 |
| Tax
cost $2,707.20 x 40% = |
$1,082.88 |
Standby charge
calculation for individual B
| Standby
charge $30,000 x 24% = |
$7,200 |
| Standby
charge reduction is nil
|
0* |
| Tax
cost $7,200 x 40% = |
$2,880 |
*did not meet
50% business driving threshold
Tax Tips – The standby
charge is calculated as the
number of 30-day periods the
vehicle is available for use.
The following tactics may reduce
the number of months the automobile
was available to the employee
and thus reduce the standby
charge accordingly:
- If a car is acquired or
disposed during the month,
the 15th is the cut off date.
Thus a vehicle acquired on
September 16th would not result
in a September benefit, whereas
a car acquired on September
14th would result in the full
month’s standby charge
being included in the employee’s
income.
- If the employee is traveling
or vacationing for an extended
period and not using the vehicle,
it can be turned in to the
employer until the employee
returns to his or her regular
duties.
- The standby charge is based
upon the original cost of
the vehicle. Thus, if a three-year-old
vehicle that originally cost
$40,000, but its fair market
value is currently $15,000
was transferred to another
employee, the standby charge
to the new employee would
be based upon $40,000 rather
than $15,000. This problem
may be avoided by selling
the car back to a leasing
company and leasing it back.
|
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