Use of an Automobile: Tax Consequences
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Use of An Automobile: Tax Consequences January 2021 Expenses incurred for the use of an automobile for employment or business purposes present a business component that justifies their deductibility for tax purposes. The tax authorities are however concerned by the personal aspect related to the use of a vehicle by employees, shareholders and business managers. This is one reason why there are so many complex tax rules on the subject. To help you understand these provisions, Raymond Chabot Grant Thornton prepared a summary of the rules for calculating taxable benefits, deducting automobile expenses and those pertaining to the allowances, refunds or advances paid to you by your employer. The various relief measures provided by the tax authorities due to COVID-19 are also presented. This publication presents an overall view of the main rules applicable. Tax measures are constantly changing and their application should be assessed based on all facts and circumstances. We therefore recommend that you consult a professional before making any decisions. We can help take you farther! This document is published by Raymond Chabot Grant Thornton for its clients. It is not intended to be an exhaustive review of statutes. Readers should not make any decisions without consulting their tax advisor. 2 1. DEFINITIONS For the purposes of this document, certain terms are defined as follows. Automobile An automobile is defined as: . a motor vehicle designed to carry individuals (maximum of nine seats) other than: an ambulance, taxi, bus, hearse; a minivan with three seats or less that is being used primarily (more than 50% of the time) to transport merchandise; a minivan the use of which is all or substantially all (90% or more of the time) for the transportation of goods or passengers, regardless the number of seats; a pick-up truck that is used primarily for the transportation of goods, equipment or passengers in the course of earning or producing income in a location which is at least 30 kilometres outside the nearest point on the boundary of the nearest urban centre with a population of at least 40,000 people; a clearly marked police car or fire emergency response vehicle, including vehicles used for emergency paramedic services. In Quebec, a written directive from the employer restricting the use of the vehicle for personal purposes and stating that the vehicle must be returned to the employer during extended absences is also required. Cost of the Automobile The cost of the automobile is the sum of the purchase price, including options, accessories, sales taxes, without taking account of the resale value and the amount (including sales taxes) of any additions after purchase. Any specialized equipment (for example, a radio transceiver, a cell phone, an electric winch) added to the automobile is not included in the cost of the automobile. Operating Costs Operating costs include gas and oil, maintenance and repair costs, license and insurance. These costs do not include interest, parking costs and highway or bridge tolls. Leasing Costs Leasing expenses include leasing costs as well as any associated costs paid to the lessor such as maintenance contracts, penalties for excess kilometres, terminal charges, including sales taxes. These costs do not include insurance to cover damages to the automobile or civil liability insurance premiums. Personal Use Personal use refers to any use of the automobile by an employee, or a person related to the employee, for purposes not related to his or her employment or business. This would include vacation trips, driving to conduct personal activities, and travel between home and work, even if the employee has to go back to work after hours to respond to an emergency, for example. However, it is generally not considered to be personal driving if the employer requires the employee to travel directly from home to a location other than the place of business to which the employee regularly reports. 2. EMPLOYEES The benefits that employees receive from their employer in the connection with the use of an automobile vary depending on whether the vehicle is leased or is owned by the employer or the employee. A benefit equal to the sum of the standby charge and operating costs has to be calculated when an employer makes an automobile available to an employee. If the vehicle belongs to the employee, the benefit will vary depending on whether the employee receives an allowance for the use of the automobile or is reimbursed for his or her expenses. Automobile Made Available to an Employee A taxable benefit must be calculated when employers make an automobile available to employees who have access to or control it, that is, the automobile is in their custody and available for their personal use. However, there is no taxable benefit if the automobile is used solely for business purposes and is not available to them for other uses.1 The employee benefit for use of an employer's automobile includes a benefit for a standby charge and a benefit for operating costs. Standby Charge 1) Employer-Owned Automobile: Number of days in year automobile is Automobile cost x 2% x available to employee 30 days 1 The Canada Revenue Agency (CRA) states that in this respect, the vehicle must be returned to the employer’s premises at the end of the workday. January 2021 3 Automobile Salespersons For automobile salespersons, the employer may use a 1.5% instead of a 2% rate if the following three conditions are met: . The taxpayer is employed primarily in selling or leasing automobiles; . An employer-owned automobile is made available to the taxpayer; . The employer acquires at least one automobile in the year. The cost of the automobile will be the greater of the average cost of all automobiles acquired by the employer for sale or rent during the year and the average cost of all new automobiles acquired by the employer for sale or rent during the year. This calculation method using a reduced rate of 1.5% cannot be used to calculate the benefit for the stand-by charge in respect of an automobile made available to a shareholder (or related person) whose main activities are the sale or leasing of automobiles, unless it is reasonable to consider that the benefit is received in the shareholder’s capacity as an employee. More specifically, it must be able to be shown that the benefit to the shareholder is comparable in nature and amount to the benefits generally offered to non-shareholder employees of a similar-sized corporation, in similar situations or if the benefit is offered to all of the corporation’s employees. 2) Employer-Leased Automobile: Number of days in year the automobile is Lease cost x ⅔ x available to employee 30 days Lump-sum Payment If the employer makes a lump-sum payment at the beginning of the lease, this amount must be allocated over the term of the lease and added to the cost of the lease for the year. However, if this payment is made on termination of the lease, the employer may decide to either apply it to the final year of the lease or to allocate it over the term of the lease and amend the T4 / Relevé 1 forms of employees who used the vehicle. Lastly, if the lessor makes a payment to the employer, the employer may choose to either reduce the lease cost in the final year or to allocate it over the term of the lease and amend the T4 / Relevé 1 forms of the employees. Reimbursement by Employee The benefit is reduced by any amounts reimbursed by the employee in the year. Reduction of Taxable Benefit The benefit may be reduced if the following two conditions are met:2 . The employee uses the automobile primarily (more than 50% of the time) for work-related purposes; . The personal use is less than 1,667 kilometres per month. The standby charge is calculated as follows: km for personal use Standby charge × Number of days in year the automobile previously calculated 1,667 km × is available to employee / 30 Operating Cost Benefit General Method . For 2021, $0.27 x number of personal-use kilometres; $0.24 for employees employed primarily in selling or leasing automobiles;3 . Mandatory unless the employee chooses the optional method. Optional Method It is possible to use the optional method if the following conditions are met: 4 . The automobile is used primarily, i.e. more than 50% of the time, for office or employment purposes; 2 COVID-19 RELIEF! Employees are allowed to use their 2019 automobile usage to determine whether they primarily use the automobile for business purposes in 2020 and 2021, such that they are eligible for a reduced standby charge for those years. Only employees with an automobile provided by the same employer as in 2019 would be eligible for this option. 3 Respectively $0.28 and $0.25 in 2020. 4 COVID-19 RELIEF! Employees are allowed to use their 2019 automobile usage to determine their eligibility for the optional method in 2020 and 2021. Only employees with an automobile provided by the same employer as in 2019 would be eligible for this option. January 2021 4 . The employee notifies the employer in writing before December 31 that this method will be used.5 The operating costs benefit in this case is calculated as follows: . Standby charge benefit (excluding any reimbursement by the employee) × 50%. Reimbursement by Employees No taxable benefits for operating costs will be calculated if all the operating costs actually incurred by the employer related to the personal use of the automobile by the employee are reimbursed to the employer or a related person within 45 days after year-end.