For most contractors and construction firms, having a solid set of wheels is a must. Traveling between client sites makes up a large part of your team’s work, and it’s often wise to invest in a business-owned vehicle. However, having an employee using a company car or truck comes with certain tax implications, so it’s essential to be aware of the ramifications for your business and your employees.
Impact on Employee Compensation
First things first, the good news. If your company provides a car or truck to an employee for their work, the business can write off the cost of the vehicle for tax purposes.
However, your employee is deemed to receive taxable employment earnings (aka wages or salary) for the benefit of having a vehicle at their disposal for personal use. You will need to ensure your employee is taxed on the benefits they receive from that vehicle.
These taxable benefits are calculated based on three elements:
The standby charge. This is the benefit accrued from having the vehicle, based on the purchase or lease cost and the number of days the vehicle is available to your employee. Regardless of whether used for business or personal use, if the vehicle is available to the employee this counts for the standby charge.
The operating cost. This is the taxable benefit that will be driven by the kilometer of personal use of the vehicle.
Employee reimbursement or out-of-pocket expenses. Where an employee reimburses the business for their use of the vehicle, or pays for the vehicle’s operating expenses out of their own pocket, the amount paid will reduce the value of the vehicle benefit they will have to report. For this to apply, the reimbursement needs to occur within 45 days after the end of the year.
CRA has a great online calculator for this that you can find here.
While this might seem like a lot, it is often more cost effective for an employee to report the taxable benefits as part of their income. This is because, from a cash flow perspective, they only pay taxes on the value of the benefits rather than footing the bill for their own vehicle. Provided you avoid some pitfalls (more on those below), both you and your employee generally will see a net benefit and pay less tax on a company car.
Pitfalls
#1 Forgetting about payroll deductions
If your business provides your employee with a car, that car becomes part of their employment earnings. And, you guessed it, it is subject to the same CPP, EI, and tax withholdings as any other wage or salary you pay them.
And this leads to the first pitfall: leaving the calculation of the vehicle-related benefit to the last minute. We’ve seen many businesses only look at the vehicle benefits when they are preparing their T4 (generally February of the following year). By that time, if your employee has CPP and EI payable on the value of the benefit, your business is late to remit them to CRA and will incur penalties and interest.
#2 Putting your employee in a pickle at tax time
The value of the vehicle-related benefit can also affect your employees’ tax bracket. Again, when a business only looks at the vehicle benefit in February, it is then too late to withhold extra taxes at the source for your employees, and they can be in for a bad surprise when they file their personal tax return.
#3 Not keeping mileage log
Similarly, you must remember to keep a mileage logs for company vehicles. We’ve seen firsthand how draconian CRA can be when there are no, or inadequate, mileage logs. Always assume your business could be chosen for a CRA audit. If this happens, you’ll be expected to show clear proof of the vehicle’s business mileage – otherwise, your tax write-off could be denied, and the vehicle-related benefit increased for the employee.
While on the subject of mileage log, please remember the drive from home to the office (or the first job site) at the beginning of the workday, and back home at the end of the workday, is considered personal driving by CRA.
Please see our blogs with tips on mileage tracking and using MileIQ
#4 Forgetting that you may also be considered an employee.
All the above rules can also apply to a shareholder of the business, even those who don’t remunerate themselves with salary. Consult your CPA for advice.
Best practices
All those pitfalls can be avoided with some of the following best practices.
Estimate the value of the vehicle and include this amount in as employee earnings each pay run. While the exact value of the vehicle-related benefits will depend on actual mileage driven, you can still make an educated guess of what the value will be on average and include that amount in as employee earnings for each pay run throughout the year. This will mean that your business will be remitting some of CPP and EI throughout the year and not fall behind, and your employee will have smaller amount of tax withheld from their pay cheque every month leaving no surprise next April.
Calculate the exact value of the vehicle in December. Another best practice that goes hand-in-hand with the above is to do a final calculation of the exact value in December, so that it can be reconciled to your ‘educated guess’ and any adjustments can be added to the last pay run of the year. This ensures your total payroll remittances to CRA are 100% accurate.
Automate the mileage tracking with an phone app or other similar tool. Doing so ensures that it’s taken care of effortlessly and provide you with rock-solid documentation. We have a blog post dedicated to this here.
GST/HST also applies
In addition to including the value of the benefit in your employee’s earnings, the business will be deemed to have collected GST/HST on the value of the benefit provided. It’s not a straight 5% calculation, and it differs by province (depending on GST/HST rates) so we recommend you simply use the CRA Automobile Benefit Online Calculator to determine that amount.
A company car is only recommended for significant usage.
If driving is a core part of the job, we generally recommend purchasing a company vehicle through your business. We’re talking a lot of regular mileage, moving between job sites or clients on a daily basis. In this case, the use of a business vehicle is so central to the work that it justifies the extra admin and tax filing that comes with it.
This recommendation only applies if you’re always on the road. If that’s not the case, it’s often more beneficial for your team to use their own personal vehicles and for your business to pay them the mileage costs. CRA allows a business to reimburse its employees $0.68 per kms on the first 5,000 driven in a year, and $0.62 thereafter as default rates (those rates are for 2023 - click here for most current rate). That per kms allowance is tax-free to your employees, while still being fully deductible by the business (including a portion of it that can be claimed as GST ITC).
Get expert advice to make the smartest decision for your business.
The benefit gained from a company car depends on your circumstances, and in some cases you’ll be better off letting employees use their own vehicles. We recommend seeking guidance from your accountant to ensure you’re making the best choice for your situation.
It’s exactly what we do at Reach CPA. We work closely with construction firms and contractors, applying years of specialized experience to help them make the smartest tax choices for their business. To get an expert assessment of the benefits you could gain from a company car, fill in our contact form.