February 6, 2008
Toronto, Ontario – While cars are considered a legitimate and necessary business expense for many employees and self-employed individuals, the tax implications can be remarkably complex, according to PricewaterhouseCoopers (pwC). Employees and employers must balance the tax and non-tax aspects to make sure they make the best choices.
“Company cars, expense allowances and reimbursements can raise productivity, provide job satisfaction and improve a benefits package – things that both employees and employers care about,” said Mark Walters, PwC Automotive Tax partner. “However, the government wants to make sure that employees do not receive personal benefits tax-free. Now is the time to plan for 2008. Employers can reduce their costs and employees can maximize their car deductions or reduce their taxable car benefits by taking certain steps.”
The company offers tips for employees with company-provided cars to minimize their taxable benefits:
- Minimize personal driving by making business trips on the way to or from work. Individuals can also reduce their standby charge, a taxable benefit which applies when the employee has access to a car for personal use, by driving less for personal reasons.
- Acquiring an older car from the employer: by purchasing an older vehicle, an employee will eliminate the standby charge and cease to have a benefit applied to the original cost of the vehicle.
- Opting out of combined flat-rate and per-kilometre automobile allowances: Reasonable per-kilometre car allowances are tax-free, but the total of a combined flat-rate and reasonable per-kilometre allowances are taxable.
Employers can reduce their own costs and/or their employees’ taxable benefits with these tips:
- Reduce the standby charge for employees by reducing the number of days cars are available.
- Buy or lease less-expensive or used cars, which reduce the capital cost or the lease cost when calculating the standby charge.
- Finance car purchases with cash, as the interest deduction on money borrowed to purchase a car is limited. It may be more tax-efficient to finance a car purchase from cash reserves, and borrow to fund working capital or to purchase other assets for which an interest deduction is not restricted.