If your employer provides you with a car for work purposes, they will often let you drive it home and use it for personal purposes as well. If so, you will normally be required to include a “standby charge” in your income.
But the value of having that car for personal purposes is difficult to determine. As a result, the Income Tax Act provides an arbitrary formula that is used to calculate the benefit.
The formula differs depending on whether the employer leases or owns the car.
Employer leases the car
If the employer leases the car, your taxable benefit for a taxation year will be calculated as follows.
You begin with 2/3rds of the employer’ leasing costs (including GST/HST) for the time during the year that the car was provided to you.
This initial amount is reduced by a “reduction factor”, but only if your use of the car for employment purposes exceeds your personal use of the car for the year, and your personal kilometres driven are less than 1,667 per 30-day period in which you use the car. If you meet these criteria, the initial amount is multiplied by the reduction factor A/B, where A equals your personal kilometres driven during the year, and B equals 1,667 per 30-day period. (If you have the car for the entire year, B is 20,004.)
Example
Your employer provides you with a car for the entire year. The employer’s lease costs for the year including GST/HST are $9,000. During the year, you drive 10,000 personal kilometres and 17,000 employment kilometres.
The initial amount is 2/3 of the $9,000 employer’s lease costs, which is $6,000.
However, your employment kilometres exceed your personal kilometres, and your personal kilometres for the year are less than 20,004. As such, you qualify for the reduction factor.
The standby charge included in your income will equal $6,000 x 10,000/20,004 = $3,000 (rounded off).
If you do not use the car for any personal driving in the year, there is no standby charge.
Employer owns the car
If your employer owns the car, the formula for the standby charge is as follows.
Initially, the amount is calculated using the formula 2% x C x D, where C is the employer’s cost of the car including GST/HST and D is the number of 30-day periods (rounded off) in which the car is available for your use.
If you meet the reduction factor criteria discussed above, the benefit is reduced by multiplying this amount by A/B as noted above.
Example
Your employer provides you with a car for all 12 months during the year. The employer’s cost of the car including GST/HST was $30,000. During the year, your drive 10,000 personal kilometres and 17,000 employment kilometres.
The initial amount is 2% of the $30,000 employer’s cost of the car ($600), times 12 months (rounding off), or $7,200.
However, your employment kilometres driven exceed your personal kilometres driven, and your personal kilometres for the year are less than 20,004. As such, you qualify for the reduction factor.
The standby charge included in your income will equal $7,200 x 10,000/20,004 = $3,600 (again, rounded off).
As above, if you do not use the car for any personal driving, there is no standby charge.
What if I pay the employer for the use of the car? (Very rare)
If you are subject to the standby charge but pay your employer any amount in the year for the use of the car (this is rarely the case), the amount you pay reduces your standby charge accordingly.
Reduced standby charge for employees employed by car dealerships
If you are employed in selling or leasing cars and your employer (typically a car dealership) provides you with a car that they own, there may be a reduced standby charge.
The employer can use the above formula to calculate the standby charge using the 2% of the cost of the car they provide to you. However, they have the option of using the same formula, but instead using 1.5% of the greater of the average cost of the new cars they acquired in the year and the average cost of all cars they acquired in the year.
Operating cost benefit
If you include a standby charge and your employer pays for any of your personal-use car expenses, you will also be required to include the operating cost benefit in your income. The expenses could include gas, repairs and maintenance, and insurance.
The operating cost benefit is also based on an arbitrary formula. There are two possibilities.
First, the general rule is that the operating cost benefit will equal the prescribed rate multiplied by the number of personal kilometres you drove in the year. For 2021, the prescribed rate was 27 cents per kilometer of personal use (24 cents if you were employed selling or leasing cars).
The second option applies only if you drive more employment kilometres in the year than personal kilometres. In this case, you can choose to have ½ of your standby charge included as your operating cost benefit (of course, you must still include the standby charge in income as well). To use this option, you must notify your employer before the end of the year.
Since it is an arbitrary formula, the operating cost benefit will typically differ from the actual personal car expenses that your employer paid.
If you repay your employer all the personal car expenses they paid, either in the year or within 45 days after the year (i.e., by February 14), there will be no operating cost benefit. This will be the case even if the benefit under the arbitrary formula was more than the personal car expenses they paid.
Example
Your employer provided you with a car throughout the year and you were subject to the standby charge. They also paid $3,000 of your personal-use car expenses. The initial amount of your operating cost benefit was $4,000.
You repay them $3,000 in the year or within 45 days after the year. There is no operating cost benefit.
If you do not fully repay the expenses, your repayment will reduce the benefit but not necessarily eliminate it. In the above example, if you repaid only $2,900 of the $3,000, your taxable benefit would be $1,100 ($4,000 minus your $2,900 repayment). Therefore, not repaying $100 would create an $1,100 taxable benefit.
COVID-19 measures
As noted above, your standby charge for a year can be reduced if your employment kilometres exceeded your personal kilometres for the year. Also, for the operating cost benefit, you have the option of using ½ of your standby charge if your employment kilometers exceeded your personal kilometres.
As a result of the COVID-19 pandemic, the government allows you to use your 2019 employment and personal use figures for 2020 and 2021. For example, if your employment kilometres were greater than personal kilometres in 2019 but not in 2021, you can use the 2019 amounts and qualify for the above reduction in your standby charge in 2021 or the ½ option for your operating cost benefit.
