The company car – A tax trap

Author: Proactive Accountants Inc. | | Categories: Accounting , Bookkeeping , Business Consultation , Estate Returns , Financial Statements , GST Filing , PST Returns , Small Business Accountants , Tax Accountants

Blog by Proactive Accountants Inc.

One of the benefits of being an owner or executive for a company has been having the use of the company car. For years it was a wonderful benefit basically ignored by our tax system. It has now become a tax trap for the users of these vehicles. Canadian tax law says that the use of a company owned vehicle is a taxable benefit to the user. The user of a company car should calculate the annual taxable benefit of the car and put it on his/hers T-4. It will then be taxed at the top marginal rate of the taxpayer.

Canada Revenue provides a benefits calculator on line to calculate this benefit.

Here is an example.

New vehicle purchased in 2020 for $ 35,000. Your company provides this for you. You put on 30,000 kilometers of which 15,000 is personal. The company pays for all the gas and maintenance.

The annual taxable benefit to you is $ 8,400 (known as a standby charge)

The annual benefit for operating expenses is $ 4,200.

The total taxable benefit is $ 12,600 assuming a 40% tax bracket then the tax payable is $ 5,040.

There is an alternative that may be less painful. If the individual uses a personal vehicle for work then they can be paid a tax free allowance by the company. For year 2021 the allowance is $ 0.59 on the first 5,000 kilometers and $ 0.53 on the rest. So in this example the taxpayer would receive a tax free allowance $ 8,250.

In both cases a mileage log should be kept. That’s a whole different issue we cover in a future article.

So beware the Company car tax trap.