Motor Vehicle Benefits

The term “vehicle” includes both automobiles as well as motor vehicles not defined as automobiles. Each is treated differently for tax purposes. Consequently, we need to examine the two definitions from the Income Tax Act (ITA) for “motor vehicle” and “automobile” as follows:

A “motor vehicle” means an automotive vehicle designed or adapted for use on highways and streets, but excludes a trolley bus and any vehicle designed or adapted to be operated exclusively on rails. [ITA 248(1)]

An “automobile” is a motor vehicle that is designed or adapted mainly to carry individuals on highways or streets and has a seating capacity for not more than the driver plus 8 passengers, but specifically excludes the following types of motor vehicles:

1. an ambulance;
2. a clearly marked police or fire emergency response vehicle;
3. a clearly marked emergency medical response vehicle used to carry emergency medical equipment and one or more emergency medical attendants or paramedics;
4. a motor vehicle used primarily [more than 50% of the distance driven] as a taxi, a bus used in a business of transporting passengers, or a hearse in a funeral business;[NOTE: Personal use of the above excluded vehicles does not incur standby charges or operating cost benefits.]
5. a motor vehicle acquired to be sold, rented or leased in a motor vehicle sales, rental or leasing business, except for benefits arising from personal use of such an automobile [the standby charge and operating cost benefit would still apply to this type of vehicle even though it is excluded from the definition of an ‘automobile’];
6. a motor vehicle (other than a hearse) used in a funeral business to transport passengers, except for benefits arising from personal use of such an automobile [the standby charge and operating cost benefit would still apply to this type of vehicle even though it is excluded from the definition of an ‘automobile’];
7. a van, pick-up truck, or similar vehicle that:
   1. can seat no more than the driver and two passengers, and in the year it is acquired or leased is used primarily [more than 50% of the distance driven] to transport goods or equipment in the course of a business; or
   2. in the year it is acquired or leased, is used 90% or more of the distance driven to transport goods, equipment, or passengers in the course of a business; or
8. a pick-up truck that was acquired or leased in the tax year that:
   1. is used primarily [more than 50% of the distance driven] to transport goods, equipment, or passengers in the course of earning or producing income; and
   2. is used at a remote work location OR at a special work site that is at least 30 kilometres away from any community having a population of at least 40,000.

[ITA 248(1)]

NOTE: If the back part or trunk of a van, pick-up truck, or similar vehicle, has been permanently altered and can no longer be used as a passenger vehicle, it is no longer considered an automobile.

Consequently, while an “automobile” is an automotive motor vehicle, all automotive motor vehicles are not automobiles. Therefore, you need to determine whether your vehicle is:

• an automobile, or
• a non-automobile motor vehicle.

If your vehicle meets the above definition of an “automobile”, then the standby charge and operating cost benefit rules apply. In most cases, the value of the standby charge and operating cost benefit are to be indicated on a T4 or T4A slip. Refer to the applicable section on the main page for further questions and answers on this subject.

If your vehicle does not meet the above strict definition of an “automobile”, then the standby charge and operating cost benefit rules do not apply, BUT the vehicle may be subject to the ITA Section 6(1)(a) benefit rules. Refer to the applicable section on the main page for further questions and answers on this subject.

NOTE: The benefit for an employer-provided automobile for the year is generally:

• a standby charge for the year; PLUS
• an operating cost benefit for the year; MINUS
• any reimbursements employees make in the year for benefits the employer otherwise would include in their income for the standby charge or the operating expenses.

STANDBY CHARGE INFORMATION

What is the automobile “Standby Charge”?

Automobile standby charges are taxable benefits related to automobile ownership costs which must be reported on behalf of employees who use employer-provided automobiles for personal use. They are intended to represent the value of the benefit derived by an employee, or by a person related to the employee, from the personal use AND availability of an automobile supplied by an employer. The standby charge is calculated to include a GST/HST/PST component. [ITA 6(1)(e)]

How is the standby charge calculated [ITA 6(2)]?

[NOTE: The following discussion outlines the basic benefit calculations. There can be variations in the calculations due to other criteria not covered here in this simpler presentation. For more detailed circumstances, such as for employees who sell or lease automobiles, for partnerships, etc., please consult the additional references noted at the very beginning of this resource presentation. You can also consider using either CRA’s Automobile Benefits Online Calculator or CRA’s Form RC18-Calculating Automobile Benefits. Either of these tools can be used to calculate both the estimated automobile benefit for withholding purposes (i.e. a reimbursement by the employee) and the taxable benefit that the employer would report on a T4 or T4A slip (for any remaining benefit amounts not reimbursed by the employee).]

The standby charge is for the benefit employees get when the employer’s automobile is available for their personal use (which includes driving between their home and the employer’s place of business). If the employee does not use the employer’s automobile for any personal driving, there is no taxable benefit, even if the automobile is available to the employee for the entire year. This applies as long as the employer requires the employee to use the automobile in the course of his or her employment.

Standby charges are calculated differently depending on whether the automobile is owned or leased by the employer.

For Employer-Owned Automobiles:

The basic standby charge for employer-owned automobiles is determined by the following formula:

[(2%) x (Cost of automobile) x (Periods of availability)]

Cost of automobile: The cost of the automobile is the actual amount paid, without regard to the list price of the vehicle. It includes all options, accessories, and the GST/HST/PST, but does not include any reduction for a trade-in. It also includes the cost of additions (including GST/HST/PST) the employer made to the automobile after it was purchased (that were added to the capital cost of the automobile for calculating the deduction for depreciation/capital cost allowance). NOTE: Specialized equipment that is added to the automobile to meet the requirements of a disabled person, or for employment, such as cell phones, two-way radios, heavy-duty suspension, and power winches, are not to be considered a part of the automobile’s cost for purposes of calculating the standby charge.

Periods of availability: This is determined by dividing the number of days the automobile is “made available” by 30 and rounding to the nearest whole number, with a .5 result being rounded down rather than up.

Made available: An employer has made an automobile available to an employee if the employee has access and control of the automobile. An employee has access and control as long as he is in possession of the keys to the automobile. This means that, if an employee who normally uses his employer’s automobile is confined to a hospital for two months, or is on vacation for a month or more, he will be assessed a standby charge during that period unless the keys are returned to his employer.

Example 1: An employer has purchased a vehicle for $31,500 (including GST of $1,500) and has made it available to an employee for all 12 months of the year. The standby charge would be 2% x $31,500 x 12 = $7,560. If the vehicle continues to be made available to the employee during subsequent full years, the benefit will be the same, regardless of the age of the automobile.

You should also be aware that the application of this formula can result in a situation where the cumulative standby charge might exceed the cost of the automobile.

Example 2: An employee has the use of an automobile that cost $52,500 (including GST of $2,500) for five years. The annual standby charge would be: 2% x $52,500 x 12 = $12,600 x 5 years = $63,000. This taxable benefit is 20% higher than the cost of the car to the employer.

For Employer-Leased Automobiles:

The basic standby charge for employer-leased automobiles is determined by the following formula:

[(2/3) x (Lease payments for the year excluding insurance) x (Availability factor)]

Lease payments: The total lease payments for the year and any associated costs, such as maintenance contracts, excess mileage charges, terminal charges less terminal credits (see explanation in CRA’s Employers’ Guide – Taxable Benefits and Allowances), including any GST/HST/PST. This total would be reduced by any amounts applicable to insuring the automobile. These insurance costs are excluded as CRA considers them to be part of the operating cost benefit.

Availability factor: This is the fraction that would be obtained where the numerator is the number of days during the year the automobile is available to the employee and the denominator is the number of days during the year for which lease payments were made. If the employee had use of the automobile throughout the lease period, the value of this fraction would be 1. However, while the foregoing is according to the strict reading of the ITA, the CRA’s Employers’ Guide – Taxable Benefits and Allowances uses the same 30-day rounding rule for both the purchase and lease situations. This ‘alternate’ calculation illustrated by CRA (as opposed to the strict reading of the ITA) will often yield a larger standby charge benefit.

Example 3: A vehicle is leased for 6 months at a rate of $750 per month, including GST. The $750 includes a monthly insurance component of $75 per month. An employee has use of the automobile for 168 days of the 184 days in the lease term.

Using the CRA approach: Since both (168 ÷ 30) and (184 ÷ 30) would round to 6, the standby charge would be $2,700 [(2/3) x 6 x ($750 – $75) x (6 ÷ 6)].

Using the ITA strict-reading approach: the standby charge would be $2,465 [(2/3) x 6 x ($750 – $75) x (168 ÷ 184)].

Unlike the employer-owned automobile, it is probably unlikely that the cumulative standby charge benefit associated with a leased automobile would ever exceed the value of the automobile.

Example 4: In Calgary, you can purchase a 2012 328i xDrive Touring BMW for $48,000 (GST included) or you can lease it for 36 months for $719 per month (GST included but excluding any insurance costs).

If the automobile is purchased, the standby charge would be $11,520 per year [(2%) x $48,000 x 12] times 3 years, equalling a cumulative benefit total of $34,560. However, if the standby charge was over 4 years, the cumulative benefit would total $46,080; and if over 5 years, the cumulative benefit would be $57,600!

If the automobile is leased, the standby charge (using the CRA guide formula) would be $5,752 per year [(2/3) x 12 x ($719) x (12 ÷ 12)] times 3 years, equalling a cumulative benefit total of $17,256.

Generally, then, the standby charge taxable benefit on a leased automobile will be significantly less than would be the case if the employer purchased the same automobile.

How can the standby charge be reduced by an employee?

Because employees’ personal travel habits using employer-provided automobiles can vary significantly between employees, there is a modification mechanism which may help to reduce the basic standby charge provided ALL of the following conditions are met:

• the employer requires the employee to use the automobile to perform his or her duties;
• the employee uses the automobile more than 50% of the time for business purposes; and
• the kilometres for personal use is not more than 1,667 per 30-day period or a total of 20,004 kilometres a year.

The ITA 6(2) standby charge formula provides for a reduction based on the amount of personal usage of the automobile. This reduction involves multiplying the basic standby charge for either an employer-owned or an employer-leased automobile (as calculated above) by the following fraction:

Non-employment kilometers [cannot exceed denominator]
1,667 kilometres x # of months of availability*

*The number of months of availability is calculated by dividing the number of days that the employee is in possession of the keys to the automobile by 30, and rounding to the nearest whole number.

Also, under ITA 6(1)(e), the standby charge can be reduced by payments made by the employee to the employer for the use of the automobile.

OPERATING COST BENEFIT INFORMATION

What is the “Operating Cost” benefit?

Employers must account for operating costs borne by the employer on account of the employee’s personal use of the employer’s automobile. They are intended to represent an additional value of the benefit derived by an employee, or by a person related to the employee, from the personal use AND availability of an automobile supplied by an employer. The operating cost benefit is calculated to include a GST/HST/PST component.

Operating costs include: gasoline and oil, licenses, insurance, and maintenance charges and repair expenses less insurance proceeds.

Operating costs do not include: interest, capital cost allowance for an employer-owned automobile, lease costs for an employer-leased automobile, or parking costs.

If the employer pays any amount of the operating costs of the automobile, then the employer has to determine the operating cost benefit by using either the fixed-rate or the optional calculation.

How is the operating cost benefit calculated?

Basic or Fixed-Rate Calculation:

The operating cost benefit is determined by multiplying the number of personal kilometres driven by a prescribed rate that is set by CRA annually. For 2011, this prescribed rate was $0.24. For 2012, this prescribed rate is $0.26.

This amount includes a notional GST or HST component so no further GST or HST benefit has to be added to this amount.

This calculation is without regard to the level of the actual operating costs, which will result in a favorable treatment for employees driving automobiles with high operating costs and unfavorable treatment for employees using automobiles with low operating costs.

Optional or Alternative Calculation:

An employer can choose the optional method to calculate the automobile’s operating cost benefit only if all of the following conditions apply:

• the employer has included a standby charge in the employee’s income;
• the employee uses the automobile more than 50% of the distance driven in the course of his or her office or employment; and
• the employee notifies the employer in writing before the end of the tax year to use this method.

If all of these conditions are met, the employer can calculate the operating cost benefit of the automobile at half of the standby charge before deducting any payments (reimbursements) the employee, or a person related to the employee, makes.

NOTE: In some cases, this optional calculation may result in a higher benefit amount than the fixed-rate calculation.

How can the operating cost benefit be reduced by an employee?

Under ITA 6(1)(k), the operating cost benefit can be reduced by payments made by the employee to the employer for the use of the automobile.

If the employee reimburses the employer in the year or no later than 45 days after the end of the year for all operating costs (including the GST/HST/PST) attributable to personal use, the employer does not have to calculate an operating cost benefit for the year.

If the employee reimburses the employer for part of the automobile’s operating costs in the year or no later than 45 days after the end of the year, deduct the payment from the fixed-rate calculation of the benefit.

What are Income Tax Act (ITA), section 6(1)(a) benefits?

Where motor vehicles, which are excluded from the definition of “automobile”, are provided OR available to an employee for personal use, they would be subject to a personal use benefit calculation but not to the standby charge or the operating cost benefit. (Note: driving from a personal residence to a place of employment is considered personal travel.)

Where an employer-owned non-automobile motor vehicle is used by an employee for personal purposes, how is the ITA Section 6(1)(a) benefit calculated?

As a taxable benefit applies for any personal use of the non-automobile motor vehicle, the employer would have to reasonably estimate the fair market value of the benefit, including the GST/HST. The amount an employee would have had to pay in an arm’s length transaction for the use of comparable transportation can be considered to be the fair market value of the actual benefit.

In situations where a non-automobile motor vehicle is essential to the employer’s business operation, and the only personal use is to provide transportation between an employee’s residence and the employer’s place of business, it may be appropriate to calculate the benefit to the employee on a cents-per-kilometre basis for equivalent automobile transportation.

In this latter case, two (2) different cents-per-kilometre bases are available, but the lower one is restricted and strictly limited, as explained below in the following tax resource excerpt:

“In Income Tax Technical News No. 40, the CRA considers the situation where an employer provides a motor vehicle to an employee and requires the employee to take the vehicle home for business reasons while also prohibiting any other personal use of the vehicle. The CRA notes that where the motor vehicle does not fall within the definition of ‘automobile’, the employment benefit for the personal use of the vehicle ‘is determined by the reasonable economic benefit derived by the employee from the personal use. The CRA generally accepts the rates prescribed in section 7306 of the Income Tax Regulations for this purpose. In most areas of Canada, that rate is currently 52¢ per kilometre for the first 5,000 kilometres driven and 46¢ for each additional kilometre [these are the 2011 rates; in 2012, the rates are 53¢ and 47¢, respectively] .’

“However, the CRA goes on to provide that, in the circumstances described above, the employee might still have to incur the costs of acquiring a vehicle for personal purposes. In this case, the economic benefit received by the employee for the use of the employer’s vehicle is equal only to the variable costs of the commute. It would be more reasonable to tax this benefit based on the operating benefit rate that applies to automobiles . . . , which for most employees in 2009 and 2010 years is 24¢ per kilometre [as well as in 2011; in 2012, the rate is 26¢ per kilometre]. The CRA will allow this lower rate to represent a reasonable benefit where all of the following conditions are met:

• The terms under which the motor vehicle is provided to the employee prohibit any personal use of the motor vehicle other than commuting between home and work and the vehicle has in fact not been used for any other personal use.
• The employer has bona fide business reasons for requiring the employee to take the motor vehicle home at night, such as: there are reasonable security concerns with respect to the employer’s tools and equipment being left at the work site or overnight at the employer’s premises, or the employee is on-call to respond to emergencies and the motor vehicle is provided to improve response to emergencies. The CRA will generally consider emergencies to be of the nature directed towards the health and safety of the general population, or significant disruption to the employer’s operations.
• The motor vehicle is specifically designed, or suited for, the employer’s business or trade and is essential in a fundamental way for the performance of the employment duties. The mere transportation of the employee does not meet the condition of ‘performance of employment duties’.

“The CRA provides the following examples in its Payroll Guide:

Example 1: Delivery Van

ABC Restaurant Inc. uses a van that has been specially modified so it can be used more efficiently to transport and deliver food orders. The employer has asked the manager, Leslie, to take the van home at night in case she needs to respond to an emergency at the restaurant, such as an after hour alarm or to fill in on busy nights. Leslie is not allowed to use the van for any other personal use. Since she is the manager, her employment duties do not include delivering food orders, even on a busy night.

ABC Restaurant cannot use the lower (24 cents per kilometre) rate when calculating Leslie’s taxable benefit. These circumstances do not meet all of the conditions of the administrative policy. Although the vehicle has been modified for business needs, Leslie does not need the van to perform her employment duties, so she does not have to bring it home for valid business reasons.

Example 2: Emergency Vehicle

Mary works for a gas utility company and has to be on-call two weekends out of every month. On these weekends, she has to be able to respond to emergencies directly from her home. The van, which the employer provides Mary for these weekends, displays the company’s name, has a light on the roof, and has been permanently modified to carry specialized equipment to the scene of the emergencies. The company has a written policy prohibiting any other personal use of these vehicles, other than driving between the work site and home. Mary has not used the vehicle for any other personal driving.

Since this situation meets all of the conditions of the administrative policy, Mary’s employer may calculate the personal use of the vehicle using the reduced rate of 24¢ per kilometre.”

Excerpt taken from, Preparing Your Income Tax Returns, 2012 Edition for 2011 Returns, published by CCH, a Wolters Kluwer business, page 77, emphasis supplied.

Both employers and employees should keep detailed mileage records on the use of an employer’s motor vehicle so that the total kilometres driven in a calendar year by an employee, or by a person related to the employee, may be properly apportioned between business use and personal use.

Personal driving of an employer’s vehicle is a taxable benefit to the employee. This refers to any driving by an employee, or by a person related to the employee, for purposes not related to his or her employment. This would include: vacation trips; driving to conduct personal activities; and travel between home and work (even if the employer insists that the employee drive the vehicle home for security or other reasons).

CRA does not consider it to be personal driving if the employer needs or allows the employee to travel directly from his or her home to a point of call (such as a salesperson visiting customers) instead of to the employer’s place of business to which the employee would normally regularly report, or to return home from that point.

“In Anderson et al. v. The Queen, 2002 DTC 1876 (T.C.C.), the taxpayers were employees of Sask Energy who were assigned pickup trucks or vans by their employer which did not meet the definition of automobile. In fact, the vehicles were specially outfitted for repair duty, and the employees were essentially always on call to deal with emergencies, and had radios in the vehicles by which they could be redirected at any time. Accordingly, they were required to take the vehicles home with them and return with them to the company offices when they did not go directly to a repair call. The CRA assessed under the general rule . . . that you must include in income ‘benefits of any kind whatever’, and added to income what it calculated to be the value of driving from home to work and back on those days on which the employees reported to the office for work rather than going directly to a repair site. The Court had little trouble on these facts in finding for the taxpayers. There was in fact little personal use and no benefit to the employees. When in the vehicles they were always at the direction of the employer.” “Note that on less extreme facts, the CRA might prevail in such a case. Where, for example, the employer simply made available a pickup truck for the employee’s general use, one would expect there to be a benefit under the general rule.” Preparing Your Income Tax Returns, 2012 Edition for 2011 Returns, published by CCH, a Wolters Kluwer business, pages 76-77, emphasis supplied.