There are many factors that come into play when purchasing a vehicle. When trying to decide between leasing and financing a vehicle, it can be difficult to determine what is the best option for you and your lifestyle. Leasing and financing a vehicle are both options that come with pros and cons. It ultimately boils down to determining what your personal financial goals are and which option is best suited to help you achieve those goals.
If you are an employer and you have determined that an employee will be using a company-provided vehicle for personal use, you must ensure that you meet the required tax reporting obligations. As an employer, you must calculate the taxable benefit to the employee of the vehicle, make the appropriate tax deductions and include the amount in the employee’s income when you issue their T4.
Whether you are investing in a vehicle for personal use or business use, let us help to break down the processes of leasing, financing and determining the taxable benefit of employer-provided automobiles:
Leasing a vehicle is like renting. You do not own the vehicle, but under many leasing contracts, you have the option to purchase it at the end of your lease agreement. Leasing is a good option for you if you aren’t interested in owning a vehicle for a long period of time and prefer to change your vehicle every few years. A leased vehicle is usually covered under warranty during the duration of your lease and tends to come with lower monthly payments than a financed vehicle because you are only paying for a portion of the capital cost of the vehicle.
At the end of a lease contract, you are required to either buy-out the vehicle or return it to the dealership and repeat the leasing process if you need another vehicle. Despite having lower monthly payments than financing a vehicle, over time, the cost of leasing several vehicles will eventually likely be higher than the cost of owning a vehicle. Leased vehicles also come with set kilometer-limits and going over these limits can result in hefty fees. Other penalties associated with leasing a vehicle can arise when trying to terminate a lease early or if there is substantial wear and tear on the vehicle.
When you finance a vehicle, you enter a contract where you make payments for a vehicle over a set period. Financing a vehicle means that you have 100% ownership of the vehicle once your automobile loan is paid off. Financing a vehicle can be a good way to help you build your credit. If you are financing a vehicle and want to return the vehicle, you can either re-finance or trade the vehicle in. These options are not available to you when leasing a vehicle.
The shorter your finance term is, the higher your monthly payments will be as payments cover the entire value of the car. For a financed vehicle, your vehicle is used as collateral for your monthly loan payments. Late monthly loan payments could result in hefty fees and increased interest rates. Any missed payments could result in repossession of the vehicle and serious damage to your credit score. Penalties for a financed vehicle could also occur if you end up stuck in a lengthy contract where you end up owing more in monthly payments than what the vehicle is worth.
Taxable Benefit of an Employer Provided Automobile
The calculation for the taxable benefit of an employer-provided automobile is comprised of two main components: the operating cost of the vehicle and a standby charge.
The operating cost includes gasoline, oil, maintenance charges, repair expenses, licenses, and insurance. It does not include interest cost, capital cost allowance, lease costs for a leased automobile and parking costs. In Newfoundland and Labrador, the operating cost for 2016 has a benefit that is equal to 26¢ per kilometer of personal use, for 2017, the benefit is equal to 25¢ per kilometer of personal use, for 2018, the benefit is equal to 26¢ per kilometer of personal use and for 2019 and 2020, the benefit is equal to 28¢ per kilometer of personal use.
The standby charge is intended to estimate the depreciation of the employer-provided automobile if the automobile is used for personal driving. The standby charge is based on the purchase cost or the lease cost of the automobile, the number of days that the automobile is made available to the employee and the actual extent of personal use. If an employer-provided automobile is used for as little personal use as possible, a reduced standby charge is applied to the taxable benefit calculation in order to reduce the tax implications for an employee. For 2003 and later tax years, a reduced standby charge is applicable when the employee uses the vehicle primarily for business purposes (more than 50% of the time) and the employee does not exceed 1,667 kilometers per month (20,004 kilometers per year) when the vehicle is used for personal driving.
If you need further assistance calculating the taxable benefit of an automobile, the Automobile Benefits Calculator on the CRA’s website is a helpful tool that can be found here.
Contact Clarified Accounting
If you are a small business owner that is currently using a vehicle or considering purchasing a vehicle for business purposes and have any further questions, please do not hesitate to contact Clarified Accounting.