The Standby Charge And Operating Cost Benefit Trap
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Quite a few business owners, in their desire to save tax, use corporate dollars to purchase vehicles that are used partially for personal use. Although they perceive that they are getting ahead of the CRA tax machine, they could be jeopardizing the very money that they think they’re keeping.
In the context of vehicles purchased in the corporation, where the corporation retains beneficial ownership of the vehicle (normally a natural fact if purchased with corporate dollars), the CRA expects that vehicle to be used for corporate purposes. However, if the vehicle is used for personal use, then the following 2 taxable benefits normally apply:
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- Standby charge:
If an owner or an employee uses a company-owned vehicle for personal use, there’s going to be a standby charge. Under certain circumstances, this taxable benefit is equal to:
2% x cost of automobile x # of months available to the employee in the year
This means that if the vehicle was available to the owner/employee for the whole year, the taxable benefit is equal to 24% of the cost of the vehicle. It’s easy to see that, in just over 4 years worth of standby charge, the owner/employee would pay a similar amount of tax on the cumulative taxable benefits as s/he would by extracting the money to pay for the vehicle initially. Added to this burden is the fact that, as long as the standby charge is in force, the taxable benefit continues on, further exacerbating the tax hit.
The standby charge can be reduced if the vehicle is used at least 50% of the time for business purposes, and limited kilometres are driven during the year.
- Operating cost benefit
If the employer has paid the operating costs of an automobile which has been available for the personal use of an employee, an operating cost benefit must be included in the employee's income, less any reimbursements by the employee to the employer. The operating cost benefit is based on the kilometres of personal use by the employee, at a rate of $0.28 cents per kilometre for 2020:
However, if the employee uses the automobile primarily (at least 50%) for business purposes, the operating cost benefit may be calculated as 50% of the standby charge, less any reimbursements.
These 2 taxable benefits can turn a money -saving tactic into an onerous financial mistake that can’t be reversed, so due care must be taken when using corporate vehicles for personal use.
Nicholas Kilpatrick is a partner with the accounting firm of Burgess Kilpatrick and specializes in tax structuring and business development for his small and medium business sized clients. Please visit our website at www.burgesskilpatrick.com or on Facebook at www.facebook.com/Burgess Kilpatrick for more information on our firm.
