You have your eye on that new BMW, but you find yourself short of cash. Instead of borrowing money for your new set of wheels, why not get the company to buy it for you?
The company may only go for it if you happen to be the boss or majority shareholder. Even if you are, you still need to be mindful of the employee-benefit issues relating to your use of a company-owned car.
Under the Income Tax Act, if you are given the use of a company car, which is also available to you for personal use, you must include in your income a "standby-charge benefit" and an "operating-cost benefit." The standby-charge benefit represents the benefit to an employee when the car is available for personal use, while the operating-cost benefit represents the expenses paid by the company to operate the vehicle. Both are taxable benefits.
This applies even if you are the sole or main shareholder of the company, as Ranapratap Singh discovered in a recent tax case.
Mr. Singh is the sole shareholder and director of RPS Industries Inc., of which he is also an employee. In June, 2000, the company bought Mr. Singh a brand new 2000 BMW, which he used for his job. The car was purchased for about $50,000 including tax.
The BMW was kept at his Scarborough home and used by Mr. Singh throughout 2002, the year under audit by the Canada Revenue Agency.
Under the Act, the standby-charge benefit when a company vehicle is used for personal reasons is equal to 2% per month multiplied by the value of the car. This amount can be reduced if the car is used more than 50% of the time for business purposes and the total kilometres driven for personal use do not exceed 1,667 per month (20,000 km annually).
For 2002, the CRA included a standby-charge benefit of about $12,000 (12 months x 2% x $50,000) in Mr. Singh's income.
The Act states that the operating-cost benefit is either equal to a prescribed rate (24¢ in 2008) per personal kilometre driven or 50% of the standby-charge benefit, as calculated above.
The CRA thus included an additional $6,000 in Mr. Singh's income as a taxable operating-cost benefit, for a total income inclusion of about $18,000 for his use of the company car.
Mr. Singh objected, testifying that he used the car "almost exclusively for business purposes" and that his personal use was limited to the commute between his home and work, plus the odd errand.
Unfortunately, Mr. Singh did not keep a log book recording the kilometres driven during the year because, he said, "his accountant had told him he was under no legal obligation to do so."
Dismissing Mr. Singh's appeal, the judge pointed out that a "taxpayer is obliged by the Income Tax Act to keep adequate books and records."
Since no records could be produced, Mr. Singh was forced to pay tax on the full $18,000 automobile benefit.