The Coronavirus pandemic has thrown many traditional business models for a loop. Distributed, or work from home initiatives are changing how employers and employees alike view where and how business is conducted. Among the disruptions Covid-19 has caused are the implications these emerging models are having on taxable benefit calculations. Don Knechtel, CPA, CA, Partner, Taxation, with Durward Jones, Barkwell & Company LLP, Chartered Professional Accountants, shares what the impacts are and how to prepare for them in the future.
If you drive a vehicle that is owned or leased by your employer, you will have a tax liability based on the personal use of that vehicle. Your employer is required to calculate the taxable benefit and report the benefit on the T4 that they issue to you annually. Most people’s driving habits have changed significantly in 2020. Our vehicles stayed parked in the driveway a lot more than normal. With more [people working from home or not working at all, travel was limited to trips to the grocery store and other essential places. So if you have a company car how might your automobile benefit look this year compared to the past?
To answer this question we first need to look at the general rules as to how automobile benefits are calculated. I will not go into the detailed calculations, but only provide a general overview. The benefit that is calculated is the amount added to your taxable income. The tax you pay will then depend on your tax bracket. The benefit to be included in your income is made up of three components and is calculated as follows:
- The standby charge for the year, plus
- An operating expense benefit, minus
- Any reimbursements made by the employee during the year.
The Standby Charge
This is the benefit you receive for having a company owned or leased vehicle made available for your personal use. There is no taxable benefit if the automobile was not used for any personal driving, even if it was made available for the entire year, as long as the kilometres driven were for employment and the vehicle was returned to the employer’s premises at the end of the day. The standby charge is calculated based on the number of months the vehicle was available. For company owned vehicles, the monthly benefit is 2% of the cost of the vehicle. For leased vehicles, it is 2/3 of the monthly lease cost adjusted for such things as a large down payment.
The Operating Expenses
The benefit arises from the employer paying for the operating expenses related to personal use. The operating expenses include gas, repairs and maintenance, licenses, and insurance. There are a couple of ways to calculate the benefit. One way is calculating the benefit equal to half the standby charge. This is only available if you use the vehicle for greater than 50% for business purposes. The other option is a fixed rate per km calculation for personal use. The rate for 2020 is 28 cents (25 cents for auto sales representatives).
Reducing the Taxable Benefit
The benefit is reduced using a prorate calculation when more than 50% of the distance travelled is for business purposes required by the employer, and the personal kilometers is not more than 1,667 per 30 day period, or a total of 20,004 kilometers a year.
How Could the Change in Your Driving Habits, because of COVID, Affect Your Benefit?
If your business use falls to 50% or less, there will be a significant effect on your taxable benefit. This could be your situation if previously you travelled significantly for your job but now work a lot more from home. Let us assume that you are employed in Ontario and your employer provides you with an automobile costing $35,000 plus HST for a total cost of $39,550. If you drive 30,000 kms of which 15,001 kms are business kms your taxable benefit will be $10,676. If your business kms reduce by just 1 km such that your business percentage is exactly 50% your taxable benefit will increase to $13,692 because you have now crossed the threshold.
If your situation is similar to the first example, in which you drive about 30,000 km in total per year with your business percentage being a little more than 50%, your benefit will be $10,676 or less. Now let us assume because of COVID you reduced your business kms by about 5,000 to 10,000 but you only reduced your personal kms by 1,000. So now, your total kms travelled is only 24,000 of which only 10,000 km is for business purposes. In this situation, your taxable benefit is $13,412, an increase of over $2,700 and you have driven fewer personal kms. This is something that you should be aware. At this point in time, Canada Revenue Agency has made no pronouncement that it intends to change how the benefit is calculated.
What You Should be Doing Now
Prior to the end of the year, you should look at your vehicle usage, including what you expect to drive for the remainder of 2020. It would be prudent to have your employer or accountant estimate your taxable benefit. For some, it may not change significantly if you have less than 50% personal kms in 2020 and you were in the same situation in 2019. If you have always had greater than 50% personal use then your benefit although high, most likely will be similar to 2019. However, if you are in the situation of crossing the 50% threshold, one way or the other you will see your benefit significantly change.