The Act provides that when an employer provides an automobile to an employee, a taxable benefit in respect of the automobile must be calculated annually for the employee. The benefit is made up of two components: the standby charge and the operating cost benefit.
Right-of-use benefit
The standby charge is calculated on the basis of the original acquisition cost (not depreciated) or leasing cost of the automobile. For the calculation of the taxable benefit, there is no maximum amount for the acquisition or leasing cost, as is the case for other tax measures concerning passenger vehicles (e.g. deduction by the company).
What benefits are taxable?
For the period during which the automobile is made available to the employee, the standby charge is equal to 2% per month (24% per year) of the initial cost or 2/3 of the cost of leasing the automobile. Special rules apply to employees whose main occupation is selling or leasing automobiles.
An employee is entitled to a reduction in the standby charge if each of the following three conditions is met:
- the employer requires the employee to use the automobile to perform his or her duties;
- the vehicle is used primarily for business (i.e. more than 50% of business use); and
- the employee travels less than 1,667 kilometers per 30-day period (or 20,004 kilometers per year) for personal use. To this end, the tax authorities. considers travel between the employee’s home and main place of work to be personal.
When all 3 conditions are met, the standby charge is multiplied by the proportion of personal use over 1,667 km per 30-day period during which the automobile is available to the employee.
The standby charge is also reduced by any payments made by the employee to the employer in connection with the use of the automobile.
Operating expense benefit
The operating expense benefit represents an estimate of current automobile-related expenses paid by the employer (insurance, repairs, gasoline, etc.) and which benefited the employee. To simplify the calculation, a prescribed rate is used to determine the operating expense benefit. In 2020, the prescribed rate was $0.28 per kilometer driven for personal use. This rate is $0.25 per kilometer for people whose main occupation is selling or leasing automobiles. In 2021, the prescribed rate is reduced by $0.01, to $0.27 per personal-use kilometer. The new rate is $0.24 per kilometer for people whose main occupation is selling or leasing automobiles.
How to calculate the automobile taxable benefit?
The operating expense benefit is determined by multiplying the prescribed rate by the number of kilometers driven by the employee for personal use during the year.
If the automobile is used primarily (more than 50%) for business purposes by the employee, and the employee notifies the employer in writing before the end of the year that he or she wishes to take advantage of the simplified method, the operating expense benefit will be equal to one-half of the standby charge benefit. This optional method is not always more advantageous than the basic method.
The operating expense benefit is also reduced by payments made by the employee to the employer during the year or the first 45 days of the following year in respect of these expenses.
Temporary relief for 2020 and 2021
The federal government has announced a temporary relief measure for the years 2020 and 2021. This measure applies to employees who normally use an employer-supplied automobile primarily in the course of their employment duties, but who as a result of the pandemic would not have reached a utilization percentage of more than 50% for business in 2020 and/or 2021.
Under the relief measure, an employee who, in 2019, would have used the automobile provided by his or her employer more than 50% in the performance of the duties of his or her office or employment will be deemed to have used the automobile more than 50% in the course of his or her employment in 2020 and 2021.
Nevertheless, the calculation of benefits (standby charge and operating costs) for the employee will continue to be based on actual mileage for 2020 or 2021.
As an example
A taxpayer works for an employer for the whole year in 2019, 2020 and 2021. The employer asks his employee to use the automobile provided for his work-related travel. The acquisition cost of the car is $50,000. In 2019, the employee drove 9,000 km for personal purposes and 11,000 km for business purposes (more than 50% for business purposes). In 2020, the employee drove 3,000 km for personal purposes and 2,000 km for business purposes (less than 50% for business purposes).
If the temporary relief measure had not been adopted, the employee would not have met the condition of having used the car primarily for the performance of his or her job (the business proportion being no more than 50% in 2020). The standby charge benefit would be $12,000 ($50,000 * 24%) and could not be reduced. For the operating cost benefit, the amount would be $840 (3,000 km * $0.28/km). The employee’s total taxable benefit would therefore be $12,840.
Thanks to the temporary relief measure, the employee is deemed to meet the more than 50% business use criterion, since he or she met this criterion in 2019 (the business proportion is more than 50% in 2019). The standby charge benefit will therefore be reduced to $1,800 (3,000 km/ 20,004 km * $50,000 * 24%). The least operating cost benefit will therefore be :
- 0.28 * personal-use kilometers ($0.28 * 3,000 km = $840); or
- half the standby charge (50% * $1,800 = $900).
With the temporary relief measure, the employee’s total taxable benefit will be $2,640 ($1,800 + $840), compared with $12,840 without the relief measure.
Under the temporary relief measure, the benefit for operating expenses is deemed to be the lesser of the fixed-rate method or the optional method. Consequently, it is not necessary for the employee to inform his employer in writing to be entitled to the optional method.
To qualify for temporary relief in 2020 or 2021, the automobile must be supplied by the same employer as in 2019. Special rules apply if the employer has been involved in a reorganization (e.g. merger or liquidation).
GST/HST and QST obligations on the automobile taxable benefit remain unchanged. An employer must therefore continue to remit taxes on the calculated taxable benefit.
This measure takes retroactive effect to January 1, 2020.
