Use of Company Cars

An employee or shareholder who is using a company car for personal use must claim a taxable benefit. A standby charge of two percent of the automobile's original cost (including PST and GST), or two-thirds of the lease cost, (including PST and GST), applies for each month the automobile is available for the employee's personal use. If the personal use of the automobile is less than 12,000 kilometers per year (1,000 kilometers per month), and the automobile is used for business at least 90 percent of the time, a standby reduction is permitted. GST is deemed to be included in the standby benefit. The employee is also charged an operating benefit unless 100percent of the personal use portion of all the operating costs are reimbursed to the employer. The operating benefit is determined using one of two options. The employee may elect to make a general declaration of 15 cents per kilometer of personal use. Alternatively, if the car is used more than 50 percent for business, the deemed operating benefit may be one-half of the standby charge, if the employee notifies their employer in writing before the end of the year. The operating benefit is reduced by any amount reimbursed to the employer within 45 days of the calendar year end. GST is calculated on the operating benefit at a rate of 5percent. The employer is only required to remit the deemed GST if they were entitled to an Input Tax Credit (ITC) when the vehicle was purchased. The ITC was available when purchased and only if the vehicle was considered to be involved in commercial activity (i.e., less than 10percent of personal use).

Stock Options

The taxable benefit that is included in employment income is equal to the difference between the value of the shares when they are acquired and the price paid for them (the option price). The timing of the taxation of the benefit will depend on whether the option is granted by a Canadian-controlled private corporation (CCPC) or not. When a corporation other than a CCPC grants the option, the benefit is included in income when the option is exercised. One third of the benefit may be deducted in computing taxable income for the same year if all the following conditions are met:

• The employee deals at arm's length with the corporation immediately after the agreement to issue the shares was made.
• The shares are prescribed shares, meaning that they may be said to have the characteristics of common shares
• At the time the stock option was granted, the price set for the shares was not less than their fair market value.

When the option is granted by a CCPC to an employee who deals with the CCPC at arm's length, the benefit is recognized when the employee sells the shares. One third of the benefit may be deducted in computing taxable income for the same year if one of the following situations applies:

• The shares were held by the employee for at least two years OR
• Both the following conditions are met:
  • the shares are prescribed shares, meaning that they may be said to have the characteristics of Common shares;
  • at the time the stock option was granted, the price set for the shares was not less than their fair-market value at that time.

Loans to Employees

A loan, or any other debt owed by an employee to their employer creates a potential attributed taxable benefit based on the prescribed rate of interest set quarterly by CCRA. The employer must include the difference between the prescribed and actual interest rate on the employee's T4 as employment income. When borrowed funds are used to acquire either income-producing property or an automobile or aircraft for employment use, the interest paid or imputed may be deductible as an offsetting expense against the resulting investment or employment income.

The imputed benefit of a loan used for a home purchase or refinancing is calculated using the lesser of the prescribed rate in effect at the time the loan was made, or the prescribed rate for each quarterly period the loan remains outstanding. All employee home-purchase loans are deemed to have a five-year maximum term, after which it is deemed to have been re-established at the prescribed rate in effect at that time.

An employee who receives a home relocation loan from an employer, for a move designed to bring them at least 40 kilometers closer to their new place of business, may be eligible to deduct attributed interest on up to $25,000 of the loan principal for five years.

Loans to Shareholders

A loan made to an employee who is also either a shareholder or related to one, is generally considered to have been made by virtue of the shareholding, rather than employment. In prior years, the full loan amount had to be included in the individual's income, unless it was repaid within 12 months of that corporation's current fiscal year end. Furthermore, the loan could not be part of a series of loans and repayments.

CCRA has now shifted its focus, running loan accounts no longer automatically constitute a series of shareholder loans and repayments. A revised position, assessing whether taxable benefits exist, places more emphasis on the use of funds rather than income receipt. The imposition of taxable benefits is now based on prescribed interest rates, as applied to the loan principal. Loan repayments are applied to outstanding balances on a first in, first out basis.

If bona-fide arrangements were made when the loan originated for repayment within a reasonable period of time, the loan may not be considered income if it occurred in the ordinary course of the lender's business or was made to enable individuals to:

• acquire a dwelling for their own use; or
• purchase an automobile for use in the course of employment; or
• purchase fully paid shares from the corporation or a related corporation (provided the individuals for their own benefit hold the shares).

Disability Insurance Premiums

It is our recommendation that any disability insurance premiums paid by the employer on behalf of the employees be included as a taxable benefit for the employee. This enables any disability benefits received by the employees from the plan, to not be subject to tax. In the case of group insurance, all employees of the group must agree to have the payments included in income.

Gifts from Employer

All gifts whether in cash or in kind including free holiday trips or expense paid vacations made to the employee by their employer are considered employment income. However, the employee is not required to report as income a Christmas or wedding gift of $100 or less, if the gift is not claimed as an expense of the employer's business. Typically, the employer will make this decision and account for it one way or the other on the employee's T4.