Company cars: Perk or penalty?
I'm getting concerned about my grandmother. I recently asked her how she was doing.
"Tim, I'm starting to show signs of aging. I've had bypass surgery, two hip replacements, a new shoulder, my eyesight is weaker than it used to be, I'm hard of hearing now, and I take 16 different medications daily for different things. My memory isn't very good any more either - I can't remember if I'm 84 or 85. My circulation is bad; I hardly feel my hands and feet any more. Oh, and I sleep a lot, and have blackouts once in a while. But, thank goodness, I still have my driver's licence."
I have to wonder whether grandma should even have her driver's licence any more. But for many of us, having a vehicle to drive is a necessary part of work. The question is, does a company car make sense? The answer will depend on a few factors.
Whether it makes sense to drive a vehicle provided by your employer or to provide your own vehicle for use in your work comes down to a number-crunching exercise. Your best bet is to have an accountant do the math for you, but there are some general guidelines that apply.
First, the answer may differ depending on whether the car is owned or leased. Next, the value of the car, its operating costs, and the percentage of your driving that is for business purposes all affect the decision to accept a company car or provide your own vehicle.
You see, if you drive a company car, you'll generally be subject to two potential taxable benefits. The first is called the "stand-by charge." This is an amount added to your income simply because you stand to benefit personally from having your employer provide you with a car. The stand-by charge can effectively add to your taxable income almost the full value of the car over a four-year period in some cases. Ouch.
The other taxable benefit is the "operating cost" benefit. This is an amount that may be added to your income where your employer pays for some or all of the operating costs of your vehicle.
The general rule, whether you're an owner-manager or an employee only, looks like this: The more expensive the vehicle (especially a car more than $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 vehicle personally, and to take a tax-free allowance from the company to help cover the costs of the vehicle.
The reason for this is that you'll avoid the ugly stand-by charge if you own or lease personally, while the company will be able to deduct (up to certain annual limits) the tax-free allowance paid to you.
Once your business use of the vehicle starts to exceed about 70 per cent, it can make sense to have the company lease or own the vehicle instead. For cheaper vehicles (say, less than $25,000) the business-use percentage can be as low as about 55 per cent for a company car to make sense.
Again, these are general rules only, and the numbers will differ depending on your specific factors.
If you can reduce the stand-by charge that will otherwise apply to your use of a company vehicle, then it can make sense in more situations to have a company car. If, for example, you leave the company car at the office (so that it's unavailable to you personally) even part of the time, you'll reduce that taxable benefit.