Temporary relief for employee automobile benefits for the 2020 and 2021 taxation years due to COVID-19
Written by HARLEY WONG from DMCL for the Canadian Overview of Q1 2021. A newsletter published by Canadian member firms of Moore North America. These articles are part of our mission to become partner of your success by keeping you informed of the news.
On December 21, 2020, the Department of Finance Canada released a backgrounder and draft legislation to provide temporary relief in respect of employee automobile benefits for the 2020 and 2021 taxation years due to the impact of COVID-19
- Reduced Standby Charges: Employees can use their 2019 automobile usage to determine whether they are eligible for the reduced standby charge for 2020 and 2021.
- Operating Expense Benefit: Employees can also use their 2019 automobile usage to determine whether they are eligible for the optional operating expense benefit calculation for 2020 and 2021. Employees who are eligible for the optional calculation will have it applied automatically, and don’t have to notify their employer.
- These changes are effective January 1, 2020.
There are taxable benefits when an employee uses an employer provided automobile for personal use. Automobile benefits are captured by the standby charge and operating expense benefit. The standby charge reflects an employee’s taxable benefit of having access an employer provided automobile that may be used for personal use. The regular standby charge is set at 2% per month of the original cost of the automobile to the employer, or 2/3 of the monthly lease payments for the year. However, a reduction to the standby charge is available when the automobile is driven primarily for business purposes (i.e. more than 50%).
Specifically, the regular standby charge is adjusted by a factor equal to the annual personal kilometers divided by the product obtained by multiplying 1,667 kilometers by the number of months the automobile is available to the employee.
The operating expense benefit is the employee’s taxable benefit arising from their employer paying costs relating to the personal portion of automobile operating expenses, such as insurance, maintenance, and fuel. The default benefit is $0.28 per personal use kilometer for 2020, and $0.27 for 2021. However, where certain conditions are met, the employee can elect for the operating expense benefit to be equal to 50% of the standby charge by notifying their employer.
Proposed Changes and Legislation
Business lockdowns, reduced business activity, and other changes to our daily and business lives throughout the pandemic, may result in an employee’s business or personal mileage being reduced compared to a normal year. If employees have used the automobile substantially less for business purposes during the pandemic, they may no longer qualify for the reduced standby charge for tax purposes, even though their personal driving use might be similar or less than last year.
To address this issue, the government will allow employees to use their 2019 automobile usage to determine whether they are eligible for the reduced standby charge in 2020 and 2021. Please note only employees with an automobile provided by the same employer as in 2019 would be eligible for this option.
For example, if an employee faced the following situation:
The employee would be able to access the reduced standby charge for 2020 based on their 2019 usage as business use was greater than 50% in 2019.
However, the employee’s reduced standby charge for 2020 would still be calculated using the employee’s actual personal kilometers driven in 2020.
Similarly, employees will be able to use their 2019 automobile usage to determine whether they are eligible for the optional operating expense benefit calculation.
For 2020 and 2021, employees eligible for the optional calculation of the operating expense benefit, would be entitled to the new treatment without having to notify their employer. Instead, an employee’s operating expense benefit would be the lesser of the amount determined using the per-kilometer rate or using the optional calculation.
These measures would be effective for the 2020 and 2021 taxation years.