Tax free auto allowances

As an accountant working in public practice, I receive numerous questions about how tax will be applied in any number of situations. One of the more common questions from individuals and business owners relates to the tax rules associated with personal vehicles used for company business. This is an important question if structured correctly an individual can receive an allowance tax-free and the business owner can deduct the full amount of the allowance paid to that individual.

From a tax perspective, an employee can receive a non-taxable allowance as a reimbursement for the use of their personal vehicle for company business. To be non-taxable, the allowance must be ‘reasonable’ and based on business use kilometres. Because a flat rate monthly allowance is not based on business use kilometres, it is generally a taxable benefit to an employee in receipt of the allowance, and normally not recommended.

Although any ‘reasonable’ allowance based on business use kilometres is not taxable when received by an employee, in B.C., the maximum the employer can deduct is currently 52 cents per kilometre on the first 5,000 annual kilometres and 46 cents per kilometre thereafter. Because of this restriction, it is typically not recommended the business owner pay an employee an allowance in excess of these amounts unless unusual circumstances warrant it (such as off-road use).

But what if your employer does not provide you an allowance to cover employment use of your vehicle? If your employer requires you to use your vehicle, they should be signing a form T2200. You can then deduct the portion of your total yearly operating expenses that relate to employment use.

Similarly, business owners will ask about the tax rules related to company owned automobiles used by employees. If you provide a company owned vehicle to an employee, and that employee takes the vehicle home after the work day is done, they are in receipt of a taxable benefit that should be reported on their T4. While the calculation is complex, the taxable benefit increases as the employee’s personal use of that vehicle increases.

A business owner who is active in their business will often use a vehicle for both personal use and company business. In these situations they will ask if they are better off purchasing a vehicle inside their company or personally. The answer to this question often depends on the price of the vehicle, its intended use, and how it will be financed. However, because of the requirement to calculate and report the benefit associated with the use of a company owned vehicle, it is generally simpler and more tax effective to purchase the vehicle personally and receive a per kilometre allowance. However, there are situations in which a company owned vehicle will be more appropriate.

The scenarios considered above deal with some of the tax issues that need to be considered when a vehicle is used for business purposes. Given the various tax results that can arise depending on who owns the vehicle, it is no wonder your accountant is faced with questions in this area. The good news is that with the right advice both employees and employers can arrive at a result that is beneficial to both parties.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.