If your small business is incorporated and you need a car to conduct business, you should ask yourself whether it is better to use your personal car and charge the company, or buy a company car. In both cases, the answer comes down to determining which one is most advantageous from a tax standpoint. Once you know the applicable rules, you can do the math and make an educated decision.
Using Your Personal Car
If you use your personal car, your company can reimburse you for the business portion of its use in the form of a motor vehicle allowance. This allowance is not taxable if it is reasonable under the circumstances and if it is based on per-kilometre calculation.
To determine if an allowance is reasonable the Canada Revenue Agency takes into consideration the type of vehicle and the driving conditions. In practice, many businesses use the per-kilometre rates found in the section of the Income Tax Regulations that limits the deduction of vehicle costs for businesses and the CRA has indicated that it considers this reasonable. For 2016, they are 54¢ per kilometre for the first 5,000 kilometres driven and 48¢ per kilometre driven after that.
These allowances may or may not cover the cost of using your particular vehicle, so you will need to determine if this is advantageous in your particular case. If you have a small, inexpensive vehicle, 54¢ per kilometre may actually be more than your cost, so the tax-free allowance may be profitable. Conversely, if you drive a large luxury vehicle, you may be out-of-pocket on motor vehicle expenses.
Finally, note that the kilometres driven from your home to your place of business are always considered to be for personal use.
Buying a Company Car
From a company standpoint, buying a vehicle allows you to fully deduct the costs associated with it and claim capital cost allowance on the purchase.
If you decide to use a company vehicle personally, then you will be taxed in two ways — a standby charge and an operating expense benefit. The standby charge is the benefit you get from having the car available for your use and the operating expense benefit is the advantage you derive from the payment by the company for the vehicle’s maintenance.
The actual calculation of the benefits will vary greatly based on two factors — the value of the car and the percentage of personal use you make of the car. As a general rule, the more you use the car for personal reasons, the less interesting this option is. When considering which option to choose, you can use the CRA’s online taxable benefit calculator to determine the actual taxable benefit that would apply to your specific situation.
In either case, you will need to keep detailed records of the kilometres driven for both personal and business purposes. You can do it the old fashioned way with a logbook or use one of several available apps for GPS enabled smartphones.