While some companies in Canada may still rely on employees’ personal cars for work purposes, other businesses buy or lease company cars. In many situations, owning or leasing a company car indeed comes with multiple benefits. These benefits include tax deductions, better control of the fleet operation as well as the economy of scale due to discounts provided by dealers, leasing companies, insurers, repair shops and other providers.
When deciding whether a company car is worth it, business owners need to understand tax consequences, insurance implications and other aspects of owning or leasing company cars vs. operating personal automobiles for business. This guide will have you covered for all your main questions about owning or leasing company cars in Canada to help you make a grounded decision.
- Personal and business use of vehicles
- Tax treatment of company cars
- Tax implications of using company cars for personal purposes
- How to know when you need a commercial auto insurance policy
- Tracking business and personal use of company cars
- Using your personal car for business
- Does a company car make sense?
- Frequently asked questions about company cars in Canada
Personal and business use of vehicles
Before you can compare your options, you need to draw a clear line between personal and business use of vehicles. A clear understanding of the differences will help to know when you can have tax deductions, need commercial auto insurance, or should have taxable benefits for personal use included in your T4 slip.
For example, the Canada Revenue Agency considers driving company cars from home to the office and back as personal use. On the other hand, when employees use vehicles for deliveries, transporting tools, products or passengers, they are driving for work purposes.
Other examples of business use of vehicles include company errands, driving to meetings with clients, bankers or partners, visiting construction sites or anything else directly related to your work.
Just like with a business credit card versus a personal credit card, understanding the difference between business use and personal use of vehicles is essential for tracking mileage and expenses, applying tax deductions, and other purposes.
Tax treatment of company cars
When businesses opt for company cars, they can decrease their taxable income by deducting vehicle costs under the Capital Cost Allowance program (CCA). In the tax context, deducting means subtracting the price of the car from gross income to reduce the taxable amount. At the same time, companies can deduct vehicle price only up to a certain amount, aka CCA ceiling.
This year, the government had increased the CCA ceiling for passenger vehicles from $30,000 to $34,000 before tax for regular cars (and from $50,000 to $59,000 for zero-emission vehicles) bought after January 1, 2022. When corporation lease company cars, they can deduct $800 per month for leases entered before January 1, 2022, and $900 after that date.
In addition, companies can also deduct other running costs to operate their company cars. The list of these expenses includes registration costs, insurance, repairs and maintenance, parking fees, as well as gas and oil. Finally, businesses can deduct the interest rate for loans used to purchase corporate cars, capped at $300 per month for 2022.
Tax implications of using company cars for personal purposes
When shareholders and employees drive company cars for personal use, they receive a taxable benefit to be included in their annual T4 slip. This taxable benefit is subject to income tax and other withholdings. The automobile tax benefit consists of two components, known as the standby charge and operating cost benefit.
Standby charge for company cars
The standby charge occurs only when employees use corporate cars for personal purposes. The amount of standby charge depends on the period the employee can use the vehicle throughout the year and the kilometres driven for business and personal uses.
When corporations own company cars, the standby charge equals 2% of the cost of the vehicle times the number of months it is available to employees. When a company leases cars, the standby charge is 2/3 of the monthly lease payment minus insurance. Companies can reduce the standby charge if personal kilometres do not exceed 20,004 km per year and more than 50% of the total kilometres are related to business use.
Operating costs for company cars
This part of the taxable benefit accounts for the fact that corporations pay fuel, insurance, maintenance and other operating costs associated with owning a vehicle. Since employees benefit when their company pays for these expenses when they drive for personal needs, the employer should include the respective amount in an employee’s T4 slip. In 2022, the rate for the operating cost benefit for employees equals $0.29/km multiplied by the number of personal kilometres.
If employees use company cars primarily for business purposes, the operating cost benefit is calculated differently. In this case, it equals 50% of the standby charge calculated as described above. Still, If this math sounds too complicated, you can calculate the amounts of your taxable benefits by using Automobile Benefits Online Calculator.
Insurance for company cars
In Canada, it is illegal to drive a car without insurance which is true for driving both company cars and personal cars. In most cases, when employees drive company cars for business purposes, they need commercial insurance.
Similar to personal insurance, commercial insurance policy includes third-party liability coverage, statutory accident coverage and uninsured automobile coverage, among other risks. The prices for car insurance may differ depending on the risks, the number of drivers assigned to each vehicle, the province you are in and other factors. Meanwhile, companies buying company cars in bulk often have greater leverage to negotiate better insurance terms for their vehicles.
The main difference between personal and commercial policies is that the former insures only your personal driving while the latter covers driving company cars for business purposes. Meanwhile, many commercial policies cover personal use of company cars, for example, when employees drive from home to the office and back. Still, it is always a good idea to double-check your coverage under commercial insurance with the insurance agent or broker.
How to know when you need a commercial auto insurance policy
There are several tests which help to determine when you need a commercial insurance policy. The first test is based on the use of the vehicle and presumes that if the car is used for commercial purposes, you will need commercial auto insurance. Typical situations of driving vehicles for business include deliveries, transporting merchandise or trips to clients.
The second test is based on the ownership of the vehicle. When a car belongs to the employer or corporation, it requires commercial insurance. The same applies when a company leases cars from a dealer who owns the vehicle and sets the commercial insurance coverage for the leased cars.
One of the most straightforward ways to know if the car is used for business purposes and needs commercial auto insurance is to check its license plates. For example, In Ontario, commercial vehicles have number plates with black letters and numbers, while personal cars have them in blue or green. Meanwhile, commercial vehicles in Quebec have license plates starting with the letter F.
Tracking business and personal use of company cars
When you use company cars both for business and personal needs, you need to track kilometres, fuel and vehicle-related expenses. You will need to have figures for business and personal kilometres to calculate the deductible part of the expenses as well as employees’ tax benefits. It is also necessary to record the reading of the car odometer at the beginning and the end of the year.
The CRA requires drivers to run a full logbook, keeping records for each business trip. Each record shall include the date when the car was used, the destination, the purpose of the trip and the number of kilometres. After keeping a full logbook for a year, you can use a simplified three-month logbook using the base year as a basis for calculations.
Using your personal car for business
Using a personal car for work is one of the alternatives to company cars. Many small business owners are motivated to use personal vehicles for business instead of purchasing company cars to avoid taxable benefits.
Instead of buying a company car, they use their own vehicles and deduct their expenses, including fuel costs, leasing costs, maintenance, insurance, interest, registration and parking fees.
Companies can also have their employees use their personal vehicles for work, paying compensation, aka a car allowance. A car allowance is paid together with wages but does not create a taxable benefit unless it exceeds the amount set by the CRA.
In 2022, the car allowance makes $0.61 per km for the first 5,000 kilometres and $0.55 per kilometre after that. In some provinces, including Northwest Territories, Yukon and Nunavut, there is an additional travel allowance of $0.04 per km.
Does a company car make sense?
There is no one-size-fits-all answer to this question because every business is different with its individual transportation needs. Some companies may opt for paying car allowance to their employees to use their personal vehicles for work while others may prefer company car. Still, there are two most important criteria, helping to determine which option is better for the organization, which are the car price and the correlation between personal kilometres and business kilometres.
When a company buys a vehicle in its name, it can deduct the car price up to the limit of $34,000 for new regular cars bought in 2022. The other factor is the percentage of personal kilometres to the total kilometres driven. When employees drive cars primarily for work purposes and less for personal travel, buying a company becomes a more advantageous option.
Calculating the benefit of a company car
When evaluating the option of having a company car, business owners calculate the savings on income tax due to deprecation, deducting the interest on the loan or their leasing payments. At the same time, you need to account for a taxable benefit that increases the employee’s tax burden, which can be only reduced as long as personal driving is minimal.
Fleet management and the economy of scale
Last but not least, business owners can have better control of their fleet and achieve economy of scale when using company cars for business purposes instead of relying on employees’ vehicles. Typically, companies can negotiate much better prices, interest, insurance rates and other terms when buying or leasing cars in bulk for their fleet compared to individual owners.
By owning or leasing company cars, corporations can optimize the operation of their vehicles, have several drivers assigned to the same car, speed up maintenance and repair, optimize their fleet costs and have better ROI. The economy of scale when buying or leasing cars in bulk, combined with professional fleet management and better control, makes company cars a preferred option for bigger organizations.
Frequently asked questions about company cars in Canada
When organizations use company cars, they also arrange for commercial insurance to cover the business use of their vehicles by assigned employees. In most cases, commercial insurance covers the same risks as a personal insurance while providing higher coverage limits. In many situations, commercial insurance covers both business and personal kilometres, but it is best to check with your insurance agent to make sure the required coverages are in effect.
It depends on how the commercial insurance policy is written. If the commercial insurance policy for a vehicle covers you as a driver both for business and personal kilometres, you may not need personal insurance. In other cases, when the company’s insurance excludes personal kilometres, you will need a separate policy for personal use.
The short answer is ‘yes,’ company cars are tax deductible. The long answer is that you can only deduct up to $34,000 of a regular car value plus tax if you buy a new car in 2022 and up to $59,000 plus tax for zero-emission vehicles. If you lease a company car, you can deduct up to $900 per month plus tax for new leases in 2022.
You can only sell a company car to yourself if you are the business owner and the company owns the vehicle. In most situations, you cannot just transfer the ownership but will need to pay a fair market value to your company, giving yourself a receipt confirming that the car was paid for. When selling the vehicle to yourself, you need to account for taxes, while the tax treatment will depend upon your province and your percentage in company ownership.
If your employer allows personal use of company cars and personal kilometres are covered by the commercial insurance policy, you can certainly drive your company car for personal purposes. Keep in mind that the Canada Revenue Agency considers driving from home to office and back as personal use, so you need to make sure you are covered by the company’s policy for all of your personal kilometres.
When a company car is available to an employee for personal use, it can result in a taxable benefit, including the standby charge and operating cost benefit. These taxable benefits can be decreased when personal kilometres don’t exceed 20,004 km per year, and more than 50% of total kilometres are related to business use.
Whether a company car is worth it or not depends on a number of factors. The two most important factors influencing the calculations are the vehicle price and the number of personal kilometres. Companies can deduct up to $34,000 of regular car value and minimize taxable benefits for employees when company cars are used primarily for business purposes. In addition, corporations can further optimize their costs through centralized fleet management and achieve economies of scale when buying or leasing company cars in bulk in their name.