A company car is a perk most business owners and employees would like to have; however, there are many things to consider before deciding to either purchase or lease a company car. In this ultimate guide, we will discuss the major components and decision factors to consider before getting a company car in Canada.
Buying vs. leasing a company car
Companies have the option to either lease or purchase a company car, and there are advantages and disadvantages to each option to consider.
Leasing a company car
Conventional wisdom is that leasing a vehicle is a poor financial decision, whether it be for personal or business use. This wisdom is due, in part, because leases traditionally cost more in the long run, the lessee isn’t building equity in an asset over the lease duration, and there are mileage restrictions and requirements to complete all recommended maintenance.
Also, the lessee is locked into the lease and will pay a penalty to break it, and at the end of the lease term, the lessee doesn’t own the car unless they buy it out. However, there are some important benefits of leasing a company car rather than purchasing one.
A leased vehicle will be new and will look as such. This will make the lessor company look good and professional when they are driving the car.
Having a company’s logo and decals on a new vehicle will signal to the community and clients the business is doing well. A company with its logo and decals on an old rusty car will give the impression the company is not doing well. This matters because people want to do business with companies that are doing well, as it signals a reputable and flourishing business! A new car will also require less maintenance and major repairs, resulting in the driver having more time to focus on whatever their said business might be.
Maintaining a company car past its prime can be costly, time-consuming, and may keep the car parked when a company needs it. This can be a significant consideration for companies that need their company car on a daily basis and cannot operate their business without one.
Lastly, a company that leases a car will spend less time and attention looking after their company car and can use this time to generate revenue. If a company earns $100 an hour, it’s easy to see how much revenue can be lost when spending precious time managing a company car.
Buying a company car
Buying a company car is typically less expensive over the long run when considering direct expenses. Purchasing a company car also allows businesses to sell the car or trade it in whenever they want.You can even buy one at an auction to potentially save some money.
They also don’t have to worry about mileage restrictions, wear-and-tear fees, or coming up with the cash to buy the company car out at the end of a term. Another advantage of purchasing a company vehicle is the business would own the car and could sell it to generate cash when needed. However, there are a few noteworthy drawbacks to buying a company car.
The major drawback of buying a company car is that the business will need to purchase the vehicle outright or get a car loan. As the car’s owner, a company would be responsible for all maintenance and upkeep of the vehicle, and the older the car, the greater responsibility. Cars also rapidly depreciate, and the advantage of having a liquid asset when needed can quickly erode.
Company car vs. car allowance in Canada
Companies considering buying or leasing a company car should also consider the option of providing a car allowance.
First, a company car is either owned or leased by a company that the owners and employees can then use. A car allowance is an amount of money provided to the owners or employees to use towards the cost of owning and operating a car they will use for business purposes.
A couple of advantages of a car allowance are that it can quickly add up and pay for a large percentage of the cost of ownership. It also reduces the time and effort a company needs to manage a company car; however, this advantage for the company is a disadvantage to the driver as the time and effort to manage the car is transferred to them.
With car allowances in Canada, there are tax implications both companies and drivers need to consider.
Personal and business use of a company car
It’s important to understand the difference between personal and business use of a company car. Personal use refers to any time you’re using the company car for reasons that are not related to work. This can include commuting to and from work, picking up friends, running errands, driving your kids to school, or going on vacation.
On the other hand, business use refers to when the company car is used for work-related purposes. This could include commuting to meetings or client sites, making deliveries, or conducting company business.
Personal tax considerations of a company car
Like most things with tax, there are company car tax nuances to take into consideration. Generally speaking, a company car should only be used for company business.
However, when it is used for personal purposes, it’s important to understand that the driver will need to pay tax on the benefit derived from personal use, a taxable benefit. In addition to income tax, taxable benefits will also attract additional Canadian Pension Plan (CPP) and Employment Insurance (EI) premiums.
Ultimately, determining the taxable benefit of a company car will come down to the extent it was used for personal purposes. Think of it like you would a business credit card: you keep your business expenses separate from your personal ones. As such, it’s important to keep track of business and personal use of a company car.
A paper mileage log book within the vehicle or using an online application is the easiest way to track mileage for business and personal use. A common issue with mileage logs is that drivers often forget to use them and then must try to recall details long after the event. It’s important for companies and company car drivers to have processes in place to prevent this from happening.
Car allowances don’t require the driver to pay tax, CPP or EI if that rate per kilometer is deemed reasonable. As of 2022, the reasonable allowance rates are $0.61 for the first 5,000 kilometers and $0.55 per kilometer after that.
Corporate tax considerations
For companies with leased cars, they can expense $800 for cars leased up to December 31, 2021, and $900 after January 1, 2022. For cars that are purchased, a company can claim up to a total capital cost allowance (CCA) of $34,000, which will then be expensed each year at a 30% CCA.
Commercial auto insurance
A company is required to have commercial auto insurance for both leased and owned company cars. Employees who are using their own vehicles for business purposes, need to inform their insurance provider. If not, the insurer could deny claims for accidents that occurred while carrying out business activities.