I was taking my daughter out for a practice drive this week. She's going to get her driver's licence this summer. We approached a yellow light and she sped up to make it through. "Sarah, you could have stopped at that light. I don't want you doing that," I said.
"Dad, Mom does that all the time," she replied. It happened again a few minutes later. "Sarah, I want you to stop when you see a yellow light," I repeated.
"But Dad, Mom said it's okay," she argued.
The next light we came to was green, and Sarah slowed down as we approach the light. "Sarah, it's a green light. You don't have to slow down. You have the right of way," I explained.
"I know Dad, but Mom's out getting groceries right now. She might be coming the other way," she said.
The cost of operating our vehicles is increasing with two kids now behind the wheel. As a result, I've been wondering whether a company car could make sense. Here's a primer on company cars.
At the end of the day, whether it makes sense to drive a company car is a mathematical exercise. Having said this, some general guidelines can apply to help in your decision to drive a company car or provide your own vehicle.
Before I get to the math, let me say that whether a car is leased or owned can affect the decision about accepting a company car or providing your own vehicle. The value of the car, its operating costs and the percentage of your driving that is business-related will all affect the decision as well.
If you happen to drive a company car, there are two taxable benefits that you could face. The first is the "stand-by charge," which is an amount included in your income for having a company car at your disposal and available for personal use. The stand-by charge can be pretty ugly.
It's not uncommon to have an amount about equal to the full value of the car added to your taxable income over a four-year period. For example, if your employer provides a car worth, say, $50,000 and you use the car 50 per cent of the time for work and the balance for personal purposes, the amount added to your taxable income each year would be $12,000. Over four years, that's a total of $48,000. Yikes.
The second taxable benefit is the "operating cost benefit." If your employer pays for all or some of the operating costs of the vehicle, this benefit could be added to your taxable income.
I encourage you to visit a tax pro if you can't do the math yourself on the impact of a company car. You'll likely want to know the exact effect in your specific circumstances. Just the same, I'll share with you some general guidelines that typically apply.
Generally, the more expensive the vehicle (particularly a vehicle over $50,000), and the less you drive it for business purposes (say, less than 50 per cent for business), the more sense it makes to own or lease the car personally, and to receive a tax-free allowance from the company to help cover the costs of the vehicle. Why do it this way? You'll avoid the stand-by charge I was talking about if you own or lease the car personally, while the company will be able to deduct (up to certain maximums) the tax-free allowance paid to you.
Using a car owned or leased by your employer begins to make sense if you're driving the vehicle mostly for business purposes (say, over 70 per cent of the time). If a vehicle is less expensive (say, under about $25,000), the business-use percentage could be lower, at about 55 per cent for a company-provided car to be worthwhile.
I should mention that you can reduce the stand-by charge if you're driving a company car by leaving the car at the office (so that it's not available to you personally) – even if you do this just some of the time. If you drive the car greater than half the time for business, and keep your personal kilometres to less than 20,004 for the year, you'll reduce your stand-by charge. Also, driving a less expensive company car will reduce the taxable benefit to you.
The Canada Revenue Agency has a handy taxable-benefit calculator online if you want to estimate the impact of driving a company car.
Tim Cestnick is managing director of Advanced Wealth Planning, Scotia Wealth Management, and founder of WaterStreet Family Offices.