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| Small Business Services: Related Articles |
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Standby Charge for Automobiles
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A common taxable benefit is that of the minimum
standby charge, which quantifies the amount that a taxpayer must pay tax
on for having a company vehicle that is available for personal use. The
usage of the phrase "available for use" can be quite onerous for certain
taxpayers because the calculation has nothing to do with usage. Certain
recent amendments (to be discussed later) have greatly reduced this
penalty for the taxation years commencing in 2003.
The philosophy behind the implementation of the minimum standby charge
is twofold. Firstly, from the employee's perspective, an asset is made
available for personal use that he or she would otherwise have to pay
for in after-tax dollars. Secondly, from the employer's perspective, the
cost of the automobile is that portion of the company's retained
earnings that is not available to the company for reinvestment in the
business process. That is why, notwithstanding that a corporation can
only depreciate the first $30,000 of the cost of a car, the entire cost
of a car is relevant in calculating the minimum standby charge. For
example, if a corporation purchased a $100,000 vehicle and made it
available for personal use to an employee, the corporation would only be
entitled to $4,500 of the capital cost allowance in the year of
acquisition, yet the employee could pay tax up to $36,000 in respect of
the minimum standby charge plus the operating benefit. Another
interesting observation is that while a car depreciates both
economically and for tax purposes, the same $100,000 is relevant for
calculating the minimum standby charge as long as the car is owned by
the corporation and it is available to an employee for personal use.
The standby charge is calculated first for purposes of calculating the
capital in respect of an automobile that has been made available to the
employee, and secondly, to calculate the benefit of having the operating
expenses of the automobile made available to the taxpayer.
For a purchased automobile, the minimum standby charge is 2% of the cost
of the automobile per month, for the number of months that the
automobile is available for personal use. For a leased car, it is 2/3 of
the net lease costs, again based on the number of months that the car is
available for personal use.
Provided that an automobile was used at least 90% of the time for
business and the personal kilometers were less than 12,000 per year then
a reduced minimum standby charge could be attained. For example, under
the presumption that the 90% business use test was met and the personal
kilometers were, say, 7,000 then only 7/12 of the minimum standby charge
would have to be included in income.
The recent amendments, which apply to taxation years commencing after
2002, have relaxed the 10% business use requirement to 50% and the total
personal kilometers can be up to 20,000 kilometers.
As mentioned previously, there is an additional component for computing
the benefit of the operating expenses for a company owned vehicle that
was paid for by the employer. Automobile operating expenses include
gasoline, insurance and maintenance costs.
There are two methods of calculating this benefit. The first is an
elective procedure that is available to employees where at least 50% of
the use of the vehicle is for business. In this case, the operating
benefit is deemed to be 50% of whatever the minimum standby charge was.
For example, if a $20,000 automobile was available for the full year and
the minimum standby charge was $4,800 then the operational cost benefit
would be $2,400 (1/2 of $4,800).
Where an employee does not meet the 50% business use test, the kilometer
method may be used that includes, as income, 174
per kilometer as a benefit for the operating costs.
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