Transcript - Episode 2: Automobile and motor vehicle benefits

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Host: Hello and welcome to the Canada Revenue Agency’s payroll podcast. On today’s show, we continue our series on taxable benefits by taking an in-depth look at automobile and motor vehicle benefits. These are some of the most complex benefits an employee can receive and an entire chapter of the T4130, Employers Guide - Taxable Benefits and Allowances, is dedicated to this topic. I asked our subject matter expert, Kira Turner, to break down some of the important concepts from this chapter, starting with an explanation of personal driving.

Kira: Personal driving really is any driving you are doing, other than driving you are doing to carry out your employer’s business. So, travelling between home and your workplace every day, that’s personal driving. If you drive on vacation, if you drive to the grocery store, if you run to the coffee shop, all those are examples of personal driving.

Host: You mentioned that driving from home to work would be included in personal driving.

Kira: Yes, that is true.

Host: Some people may be surprised that’s personal in nature. Could you expand on that? Why do we consider that to be personal?

Kira: It’s well-established in court cases and it’s CRA’s long-standing position that costs associated with getting to and from work are personal in nature and therefore, whenever an employer pays a personal amount for an employee or provides some sort of assistance, such as the provision of a car, that would be a taxable benefit. So getting to and from work is personal driving.

Host: Ok, and what about if someone has multiple work locations?

Kira: Travel between home and any regular place of employment is personal driving. So, a person can have more than one regular place of employment. In fact, a regular place of employment doesn’t have to be an establishment of the employer. An employee who has to report to a client’s premises once every week for some sort of meeting or some sort of maintenance call, or something along those lines, that client’s premises would be considered a regular place of employment because on a regular basis, they’re required to report there.

Host: Ok, so if I understand correctly, you’re driving from home to work, that regular place of employment, that would be considered personal, but what if throughout the day you’re required to irregularly visit clients or leave that office, that regular place of employment to perform other duties. Would that then fall within business use, or would that still be personal?

Kira: Driving from one regular place of employment to another regular place of employment would be considered business driving. It’s the trip between your home and your first regular place of employment of the day that is considered personal driving. If you however go to a point of call, somewhere that you do not regularly report, go from home to a point of call before heading to a regular place of employment, we would consider that to be business driving as long as the sole purpose of the trip is not to negate the personal element of the driving. There has to be a legitimate business reason to go to that point of call.

Host: So only the portion that’s personal would play into the actual taxable part of that benefit, the driving that’s for business purposes would be excluded from being taxable?

Kira: That’s true. As we said in one of our previous episodes, personal expenses or personal items that the employer provides to the employee are taxable benefits of employment. Usually, if it’s obtained or carried out for the purposes of the employer’s business, that would not be considered a taxable benefit.

Host: Do we provide specific guidelines as far as when we say this is a regular place of employment and an employee may have multiple regular places of employment? Do we define that in any way? Where’s the cut-off for what’s regular and what would be irregular?

Kira: I would say that Income Tax Rulings’ opinions have held that even as infrequently as once a month would still be considered a regular place of employment.

Host: Ok, so if that’s the case, there’s an important distinction between what’s personal and what’s business use. I imagine it’s really important to keep records of exactly when you’re using the automobile for what purpose.

Kira: Absolutely. Records are the key to automobile and motor vehicle benefits and there’s no question about that. The employee should be keeping logbooks of their kilometers driven. The employer should know at the beginning of the year what the kilometers on the car are and at the end of the year the employer can also read that because the employer does own the automobile. During the year, it’s the employee’s responsibility to keep records as to which driving is personal and which driving is business. It can be kept digitally, you can have a GPS, there’s various ways to do it. CRA does not dictate how it must be done, but really it needs to be done. If in a compliance review situation it is found that no records have been kept for the purposes of assessing a benefit, the CRA will assume that 20,004 kilometers in the year were personal. Depending on the make of the car, the cost of the car, that can lead to a fairly significant benefit. So it’s really to the employee’s advantage to keep records.

Host: After the break, I’ll ask Kira to explain the differences between an automobile and a motor vehicle and how this affects the value of the benefit an employee may receive. Stay with us.

Cutaway #1: The Canada Revenue Agency offers a number of videos and recorded webinars to help businesses understand their tax responsibilities. They provide information on key subjects businesses may face, such as payroll matters, taxable benefits, what to expect from an audit, and more.

To view our videos and recorded webinars, visit us at cra.gc.ca/videogallery.

Cutaway #2: The CRA’s Payroll Deductions Online Calculator calculates federal, provincial, and territorial payroll deductions. It confirms the deductions you include on your official statement of earnings.

The calculator also includes an option to make sure that enough Canada Pension Plan contributions and Employment Insurance premiums are withheld for full-year employees. It calculates payroll deductions for the most common pay periods, as well as the applicable province or territory.

The Payroll Deductions Online Calculator is available at cra.gc.ca/pdoc.

Host: It’s important for employers to understand how the CRA defines an automobile compared to a motor vehicle because we treat them differently for income tax purposes. I asked Kira to explain how the CRA differentiates between the two and how the value of the benefit is calculated in each scenario.

Kira: An automobile is a vehicle designed or adapted to be driven on roads carrying not more than, carrying up to eight people, including the driver. It’s defined in the legislation. It’s very specifically defined in the legislation and I invite people to look at that or to, it’s also in our T4130, Employers’ Guide - Taxable Benefits and Allowances, because there’s certain nuances, certain types of things that might in some circumstances be considered an automobile, might be excluded, such as if it’s a clearly marked emergency vehicle or something of that nature, like say a police car. I’m familiar with Ontario where the Ontario Provincial Police have what are often called panda cars, the black and white police cars. That would usually be considered an automobile, except for the fact that it’s a clearly marked emergency response vehicle. So basically, the definition for an automobile is very specific and anything that does not meet that definition is a motor vehicle.

Host: Why the distinction between the two?

Kira: Well, there are several reasons I can think of. One, an automobile is much more likely to actually have a significant personal component to the driving. If, you know, you bring a dump-truck home overnight, there’s very little chance you’re going to run out and do your errands in a dump-truck. You’re probably going to take the family vehicle. But if your employer provides you with a nice sedan, why would you drive your own vehicle and have wear and tear on your own vehicle when you could drive the employer’s vehicle and not have that wear and tear so your own car will last longer. You’re not going to need to make an investment.

Host: Let’s say the car we’ve determined the car we provide to an employee is defined as an automobile, how can we determine the value of the benefit the employee is receiving?

Kira: Well again, this comes directly from the legislation. There’s very little wiggle-room in the calculation of the benefit. An automobile benefit is comprised of two components; the standby charge and the operating expense benefit. The standby charge is designed to approximate the value of the wear and tear on the car and recognize not only the actual personal kilometers driven, although that is a component of calculating the standby charge, but also the length of time and the days that the car was available to the employee for their personal use.

Host: That’s one thing I wanted to touch on as well, when we talk about the availability of a vehicle. Could you expand on that? Does that only include the days the car was actually used? What if it’s sitting unused in someone’s driveway?

Kira: It’s still available to the employee, for the employee’s use. Even if they’re on vacation and have left that employer vehicle in their garage at home, they still have the keys and they could if they wanted to use it. So it truly is availability, not actual days used.

Host: The second aspect of calculating the value of an automobile benefit, you had mentioned the operating expense. Could you talk a little bit about that and how that’s calculated?

Kira: Yes, the operating expense benefit is pretty much what it sounds like, the expenses associated with operating the vehicle. So if it’s the employer’s vehicle, the employer is also paying the insurance, often paying for maintenance and things of that nature. It would not include things like tolls and things of that nature. But the operating expense benefit also benefits the employee because they’re not paying for gas, they’re not paying for maintenance, they’re not paying for insurance, so they’re receiving that benefit. Even if they have a personal car and they have to keep insurance on that personal car, that insurance will be lower because they’re not commuting to work. So the operating expense reflects that. The employee can reduce the operating expense benefit if the employee reimburses the operating expenses to the employer. It can be reduced to zero if that reimbursement happens during the year or during the first sixty days of the new year.

Host: Ok, so when it comes to calculating the value of an automobile benefit, we take the standby charge, the operating expense, and those two added together would equal the value of the automobile benefit.

Kira: Yes, those two amounts added together. It’s standby charge, plus operating expense benefit, less any reimbursements the employee makes.

Host: Do we provide any tools or guides to help employers calculate that value?

Kira: Well as I mentioned, there is the T4130, Employers’ Guide - Taxable Benefits and Allowances, which has an entire chapter devoted to automobile and motor vehicle benefits. The CRA also has an online tool called the Automobile Benefits Online Calculator or, as we like to call it around here, ABOC, because we love our acronyms. And basically, as an employer, you can just plug in the information and a number is spit out. I believe it now even has been enhanced to calculate the GST that needs to be included in the benefit. And a kind of old-school paper version, we have a form called the RC18 which is another kind of step-by-step worksheet that can be used to calculate an automobile benefit.

Host: Ok, so we’ve covered how to calculate the value of an automobile benefit. We’ve yet to touch on the value of a motor vehicle benefit. Could you touch on how that differs from the value of an automobile benefit?

Kira: Well there’s no standby charge or operating expense benefit for a motor vehicle benefit. It’s basically just the fair market value of the use of the vehicle. And what I mean by fair market value is the employer has to estimate the costs that he’s paying, and the value of the benefit the employee’s receiving. The wear and tear on the vehicle, any maintenance costs, any gas, oil change type costs, any insurance costs, and those things all added together equal the motor vehicle calculation. There’s no standby charge, there’s no charge for number of days in a year that the vehicle is available to the employee. In general, we do tend to accept the prescribed rates in regulation 7306 as a reasonable way to arrive at the fair market value of a motor vehicle. So that is, I believe, in the neighbourhood of $0.55 per kilometer for the first 5000 personal kilometers driven, and $0.49 per kilometer for every kilometer after that. CRA would accept the fair market value being that calculation for the personal kilometers driven. We also allow an additional $0.04 per kilometer in the territories.

Host: Ok, so when it comes to a motor vehicle, you would look at the logbook, look at how many kilometers were used for personal use and then multiply that by the cents per kilometer.

Kira: Exactly. If there’s 15,000 personal kilometers, you would multiply 5000 by 0.55 and then you would multiply 10,000 by 0.49.

Host: Ok and what about the motor vehicle home at night policy? Could you explain a little bit about what that is? When would that come into effect?

Kira: The motor vehicle home at night policy allows a reduced kilometric rate provided there are very specific conditions laid on the use of the vehicle. So there has to be restrictions on the personal use. The employer can say you can drive it to and from work and that’s it. And there has to be a bona fide or legitimate business reason why the employee has to take that vehicle home at night. It’s not just a perk of employment, it’s that the employee is on call and the vehicle is designed or adapted specifically for the employer’s business. So say the employer is in some kind of maintenance type of role and the van that they take home has all the tools in it and all the equipment in it that they need to carry out their duties and so they have to be available to immediately respond to emergencies and it’s to the employer’s benefit and for the employer’s business. Therefore, it’s a legitimate business reason that the employee shouldn’t have to drive to the employer’s premises, pick up the repair van, and then go out on the call.

Host: Ok, so we offer them that reduced rate. It’s sort of a way of acknowledging that the reason you’re bringing that home is to be better able to perform those duties, so you’re available if something comes up.

Kira: Your employer is requiring you to bring the vehicle home. This is a point that comes up sometimes when discussing the automobile and motor vehicle benefits. When the employee says I don’t even want to take the employer’s vehicle but I have to, it’s a condition of my job so why should I have a benefit? Well you have a benefit because you’re still doing personal driving. Whether your employer requires you to do it or not, you’re still advantaged by the fact that you are not using your own vehicle to drive to and from work. And that has to be reflected in your income. But we do recognize in these specific situations a lesser calculation is appropriate.

Host: Thanks for listening to the CRA’s payroll podcast. If you have any questions about the show, if you’d like to provide feedback, or request a topic for a future episode, you can reach us by email at podcast@cra-arc.gc.ca. We’d love to hear from you.