How to Calculate Your Automobile Taxable Benefits for the Purposes of the T4 and Rl1

The majority of businesses require the use of cars and other types of vehicles to meet with clients, and suppliers, purchase goods, make service calls and of course check in with their accountants.   The usage of a car for tax purposes is not necessarily straightforward as many employees and business owners use their vehicles for both business and personal reasons.  As such, Revenue Canada has had to implement tax legislation that ensures that the personal portion of automobile usage is properly adjusted  and excluded from deductible businesses expenses.

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What is a Taxable Benefit?

Employees who receive a personal benefit from a transaction that has been paid for, and deducted by, a business would reflect this as a taxable benefit on their T4s and RL1s.  Common examples of taxable benefits relate to:

• automobiles,

• cell phones,

• child care,

• cash gifts,

• non cash gifts that exceed $500,  

• private health insurance (in Quebec only)

and others 

Essentially, if an employee derives a personal benefit, from a business related expenditure, there should be a determination of whether it qualifies as a taxable benefit. As defined by CRA, a taxable benefit:

A benefit is a good or service you give, or arrange for a third party to give, to your employee such as free use of property that you own. A benefit includes an allowance or a reimbursement of an employee's personal expense.

Source

When are Employees Required to Show an Automobile Taxable Benefit?

Taxable benefits are only applicable to employees of businesses who use their cars for both business and personal purposes.  There are two situations where an employee would reflect a taxable benefit on their T4 and RL1:

1. They receive a fixed or flat rate allowance from their employer for the use of their own personal car OR

2. A company owned car is used by the employee for personal reasons.

What is the Taxable Treatment for a Fixed or Flat Rate Automobile Allowance?

If an employee receives a fixed or flat rate allowance, which is not equal to the CRA allowable allowance per kilometre driven , the full amount of the allowance would be shown on their T4/RL1.  As this is a cash payment made on a periodic basis, this is simply reflected on Box 14 as employment income.  It would also be reported on Box 40 of the T4 which is “Other taxable allowances and benefits”.  Note that box 40 does not constitute additional income (as the income has already been included in box 14 of employment income) but rather is for informational purposes. The employee is then allowed to deduct the costs of operating their automobile on their own personal tax return.

How to Reflect a Taxable Benefit for Personal Use of a Company Owned Car?

When an employee is given access to a company car and uses it for personal purposes a taxable benefit has to be computed and reflected on the employees T4 and RL1. CRA defines personal use as

”An automobile is available to your employee if they have access to or control over the vehicle. It includes any part of a day, weekends and holidays during the calendar year”.   

The computation of the taxable benefit has two components:

1. A “standby charge” which calculates the availability of the car for personal purposes based on the purchase price or the lease cost of the car

2. An operating expense benefit

Both the standby charge and operating benefit can be calculated by using the online automobile taxable benefit calculator provided by CRA which requires the following information:

• Cost of the automobile if it was purchased (including sales tax)

• Any capital additions to the vehicle (not regular repairs and maintenance)

• Lease costs if the car is leased

• Lease term

• Province

• Number of total kilometres driven during the year

• Number of business and personal kilometres driven during the year

• Any amounts reimbursed by the employee

Once the taxable benefit has been calculated including the standby charge + operating benefit less reimbursements,  it should be entered on the T4 on box 14 (included in Employment Income) and box 34. On the RL1 (T4 equivalent for Quebec), personal use of automobile benefis should be reflected on Box A and Box W. 

Most payroll programs have a way to do this so that the taxes are correctly calculated.  Note that automobile benefits are subject to CPP and QPP, however, they are exempt from EI and QPIP (in Quebec)

Ideally, the taxable benefit should be calculated before January 15th of the year following the application of the charge so that taxes can be added to remittances due to CRA and Revenue Quebec and there is no additional interest to pay.  Alternately, the additional tax can be paid as an adjustment when the T4s and RL1s are filed. 

Is it Better to Have a Company Car or Receive An Allowance?

If an employee uses a company owned car more than 50% of the time for purposes of personal travel the taxable benefit will be significantly higher than if used less than 50% of the time.  In this case it makes much more sense to give the employee either an allowance or the CRA approved car reimbursement per km of business travel which is $0.70 for 2024 for the first 5,000 kms.  If the employee is reimbursed this exact amount, no taxable benefit has to be calculated which also helps to reduce the hassle and administration of keeping track. 

Alternatively, the employee can submit expense reports to the employer based on business kilometres travelled for car expenses they incur including:

• Financing costs

• Leasing costs

• Repairs and maintenance

• Registration

• Gas

• Insurance

Other Points to Consider

• Travelling from home to work is considered to be personal use of a car and would be included in the calculation of personal use

• Employees are required to keep a log of total kilometres travelled. Details of business travel should include the dates, business purpose and number of kms for each trip.  They should get into the habit of recording their odometer on January 1st and December 31st, annually.

• If the personal usage is consistent from year to year, it might make sense to reflect a taxable benefit on every paycheque based on the previous year calculation and make an adjustment at year end.   This way the taxes are paid monthly rather than all at once. 

• When reviewing taxes to pay on taxable benefits, CRA provides a taxable benefits chart that is quite useful

While using a car for travel is necessary for many small businesses, it is important to assess the costs and benefits associated with each method.  Car dealerships will often encourage business owners to have their corporations purchase a car without understanding the tax consequences.  It also always a good idea for the business owner to do some research or speak to their accountants to ensure that the tax consequences aren’t unnecessarily onerous.

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