Automobile Benefits and Standby Charge

Employers may provide their employees with automobiles in order to help them perform their job duties. A company car has been known to increase morale and encourage productivity but it comes at a cost. A company car may not be a free ride as tax consequences could arise for the employee such as the standby charge.

Automobile Benefits

When an employee uses the employer’s vehicle for personal use, they may incur a taxable benefit. The amount of the taxable benefit is calculated using two formulas:

Standby Charge
An Operating Cost Benefit

Standby Charge

When an employee receives a company car in order to complete his or her employment duties, they may also use this vehicle for personal use. This personal access to the car would create a taxable benefit for the employee. The vehicle could be owned or leased by the employer and it’s important to distinguish this fact as there are different formulas used to calculate the taxable benefit to the employee.

If the employee does not use the company vehicle for personal use, there is no taxable benefit as long as the vehicle is driven only for employment purposes and is returned to the company’s premises at the end of their shift.

Operating Cost Benefit

Operating Cost Benefit includes expenses that an employer would pay when the employee uses the vehicle for personal use. This would include expenses such as gas, maintenance, licenses, insurance, etc. If the employee makes any reimbursement to his employer, the reimbursements would have to be subtracted from the expenses.

Calculating the Standby Charge

Employer-Owned Vehicles

Employer-Leased Vehicles

If any reimbursements are provided by the employee to the employer, the amount would be subtracted from the stand-by charge.

Reduced Standby Charge

Since 2003, the stand-by charge may be reduced if the kilometres driven for business are greater than 50% of total kilometres. In addition, personal use driving does not exceed 20,004 kilometres per year or 1667 kilometres per month!

Calculating the Operating Cost Benefit

An employer can use the fixed rate method to calculate the operating cost benefit or the optional benefit. The difference in the methods used could result in a lower taxable benefit.

Fixed Rate Method

Fixed Rate methods requires you to keep detailed records of you using the car for personal use. The fixed rate for 2019 is $0.28 per kilometre of personal use, including GST/HST and PST.

Optional Method

The optional method could could be used if the automobile is used for business greater than 50% of the time. If this is the case then the operating cost benefit would be half of the standby charge before any reimbursements are made by the employee. An employee would notify the employer by year end to use this method.

Example of Calculation

In 2018, Jim drove a $32,000 company owned vehicle for a total of 22,000 kilometres. Out of this, 70% of the kilometres were for employment purposes while the other 30% accounted for personal driving. Jim kept records detailing his employment and personal driving during the year. The operating costs of the vehicle during the year was $4000 and the company paid for all the operating costs.

What is Jim’s taxable benefit?

1. Calculate the Standby Charge

2% x $32,000 x 12 Months
- = $7,680 for the year

2. Calculate Reduced Stand-by Charge

Since the vehicle was used greater than 50% of the time for employment purposes and Jim did not exceed 20,004 kilometres a year of personal use, he is eligible for a reduced stand-by charge.

= $2,533

3. Calculate the Operating Cost Benefit

Since the vehicle was used more than 50% for business and employment purposes, the optional method to calculate the operating cost benefit could be used.

50% x Reduced Standby Charge
- 50% X $2,533
  - = $1,267

Fixed Rate Method -Jim could’ve used the Fixed Rate method to calculate the operating cost benefit as he kept detailed records showing his employment and personal use of the vehicle. He drove the car for 6600 kilometres for personal use and the fixed rate method for 2019 was $0.28. If you were to multiply 6600 by $0.28, you would get $1,848. Since the reduced standby charge is lower ($1,267), there is no benefit for Jim to use the fixed method.

4. Total Income Inclusion

To determine the total taxable benefit, add the standby charge + operating benefit to determine the total income inclusion.