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  • Writer's pictureBenoit Therrien CPA

Should You Rent OR Buy A Company Car or Personal Car As A Shareholder?


rent or buy a car

Introduction


As a shareholder, employee or owner of a company, you might be wondering whether you should rent/buy a company car for work and personal use.


If you purchase the car through your company and use it for personal journeys, you will have to declare it as a taxable benefit at the personal level. On the other hand, if you purchase the car with your own money and use it for work purposes, you can bill the company for non-taxable allowance.


When acquiring a company car, you’ll also have to decide whether you want to purchase outright or rent the vehicle.


With all this in mind, let’s explore which option is best from a tax and, most importantly, a financial standpoint.


Tax Implications of a Company Car in Quebec

Automobile and taxes

If the car is used entirely for business purposes, meaning you leave it at the business’s location each night, there will be no taxable benefit.


If the car is used partially for personal purposes, you will have to declare it on your personal tax return, on the personal portion, a taxable benefit.


Take note that kilometers traveled to commute to and from work are considered a personal expense.


The taxable benefits associated with a vehicle provided by a company are twofold:

  • Operating expenses;

  • Right to use expenses.


The total amount calculated for these benefits depends on the type of car driven, the total cost of purchasing/leasing the vehicle, the prescribed interest rate, the number of kilometers driven for personal reasons, and the fixed rate per kilometer.


Operating Expenses


To calculate operating expenses, you can use either the prescribed fixed rate set by the federal government, or the optional method based on actual costs incurred by the company.


  • The prescribed fixed rate for 2023 is 33 cents per kilometer.


  • The optional method requires you to keep detailed records of expenses related to the car, such as gasoline, oil, repairs, insurance, etc. To determine the taxable benefits, you must calculate the percentage of total kilometers driven that were used for personal reasons and multiply this percent by the total expenses.


Right to Use Expenses


For right to use taxable benefit, you must calculate the annual expenses based on the purchase/lease of the car, the prescribed interest rate, and the number of days the car was made available to the employee in question.


  • The purchase cost includes the total amount the company paid to acquire the car, including the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST), as well as the Provincial States Tax (PST), if any are applicable.

  • The lease cost includes the monthly payment amounts made by the company to lease the car, and the GST/HST or PST, if any are applicable.

  • Here, the prescribed interest rate is the rate that applies to loans taken by employees from their employers. For 2023, the prescribed interest rate is 1%.

  • The number of days the vehicle was made available to an employee corresponds to the total number of days an employee had access to the car, regardless of whether it was driven. For instance, if you leave the car at the office, but have the keys in your possession, this means the car was made available to you.


The following formula is used to calculate right to use taxable benefit:


Right to use = [(purchase cost x 2%) + (lease cost x 2/3) + (purchase cost x prescribed interest rate)] x number of days/365


If you, as an employee, use the vehicle primarily for business purposes, meaning more than 50% of the usage is for business purposes, and do not exceed 1667 kilometers per month (20,004 kilometers per year) when using the vehicle for personal purposes, you are entitled to a reduction for the taxable benefit. In these cases, the formula becomes:


Right to use expenses = [(purchase cost x 2%) + (lease costs x 2/3) + (purchase cost x prescribed interest rate)] x number of days/365 x personal kilometers/20,004 kilometers


Important Factors to Consider

les tendances

When choosing whether to buy/rent a car personally or through your company, there are several factors to consider. Before you make your final decision, perform the necessary calculations with the actual purchase/lease amounts.


Should You Rent OR Buy A Company Car?


The answer here depends on two things:


• The percentage of personal use

• The operating costs of the car


The percentage of personal use


Lease costs are taxed at two thirds (2/3), so long as the car is used for business purposes for less than 50% of the total kilometers driven. For example, if you use the car for personal purposes between 55% and 95%, 66% of the lease costs are considered a taxable benefit. With this in mind, if you intend to use the car for personal reasons between 51% and 66%, it’s better to acquire it personally.


If you use the car for personal reasons between 66% and 100% of the time, it’s better to lease the car through the company as you will only be taxed at 2/3 of the lease costs.


However, if you use the car for business purposes for more than 50% of the total distance driven, so less than 50% for personal use, it may be better to acquire the car through your company if, and only if, you qualify for the right to use expenses reduction. This means, on average, you drive less than 1,667 kilometers per month (or 20,004 kilometers annually) for personal purposes. Perform the above calculations to determine which option best suits your intentions for the vehicle.


Here are two examples, one where it is more advantageous to acquire the car through the company, and another where it is less advantageous:


1. An employee uses the car for personal purposes at a rate of 10,000 kilometers per year, and for business purposes at 11,500 kilometers per year. Their personal use is 46% but they qualify for a right to use expenses reduction.


Their taxation will be at 2/3 of the leasing amount, so:


66% x 10,000 km/20,004 km = 33%


In this case, it is better to acquire the car through the company.


2. An employee uses the car for personal purposes at a rate of 18,000 kilometers per year, and for business purposes at 20,000 kilometers per year. Their personal use is still 46%, but they do not qualify for the right to use expenses reduction.


Their taxation will be at 2/3 of the leasing amount, so:


66% x 18,000 km/20,004 km = 59%


In this case, it is better to acquire the car personally.


The operating costs of the car


When deciding whether to purchase the car through the company or personally, you’ll also need to consider the total operating costs of the car. These costs include gasoline, oil, maintenance fees and repairs, insurance and licensing costs.


If the operating costs are higher than 33 cents per kilometer, either because your car is fuel-inefficient, your insurance costs are high due to you being a new driver, or because the car is valuable, it may be better to acquire the car through the company and only be taxed 33 cents per kilometer.



When the corporation acquire the car, should we buy or lease the car?


Be sure to calculate the tax impact of buying or leasing a car through the corporation. But, in general, leasing creates a lower taxable benefit than buying the car.


Using your personal car for business purposes…

Automobile for business

If you are an employee or a shareholder who uses their personal car for business purposes, there are two forms of compensation you may be entitled to:


Compensation 1


  • If the kilometer allowance is reasonable, it is non-taxable. For example, in 2023, the government sets 68 cents per kilometer for the first 5000 kilometers, and 62 cents per kilometer thereafter as non-taxable benefits.

  • The employee cannot deduct operating costs of the car in their personal tax return.

  • If the company pays more than 68 cents per kilometer for the first 5000 kilometers and 62 cents thereafter, they will not be able to deduct the excess amount they pay to the employee.


This form of compensation is best for employees who cover a significant distance in their vehicle.


Compensation 2


  • The company issues a T2200 form, and in Quebec, the TP-64.3 form, allowing the employee to deduct their car expenses within the scope of their employment.

  • The company can pay the employee a salary to compensate for expenses associated with the vehicle


This form of compensation is best for employees who cover short distances, or drive cars that are costly to operate.


When you personally acquire the car, should you buy or lease it?

Louer ou acheter son automobile

Again, the answer to this question depends on several factors. These include your needs, budget, lifestyle, and personal preferences. Though there is no one-size-fits-all option, buying and renting both have unique pros and cons.


Here are the most important things to consider:


Buying a Car


Purchasing the car outright means you are/your company is the sole owner of the vehicle and can keep it for as long as you wish. There are no limits on distance traveled or additional fees to pay when you decide you no longer need the car. You can customize the vehicle to your personal tastes, and sell or exchange it whenever it suits you.

  • However, purchasing a car requires a much higher initial investment, whether in cash or through financing options. You will also be responsible for any repairs that need to be made to the vehicle during your ownership, and will have to account for the depreciation in value of the vehicle over time.

Renting a Car


  • Renting a car allows you to drive a newer make/model, without having to fork over large sums of money upfront. You will get the benefits associated with the manufacturer’s warranty, and the monthly rental payments will usually be lower than those associated with a loan needed to purchase a car. You can also switch out the car for a newer model as frequently as is outlined in the rental agreement, and can take advantage of new technologies.

  • However, rental cars have restrictions on the amount of distance they can travel and the vehicle’s condition when returned to the dealership. Breaking these restrictions can result in expensive penalties. Also, you will not own the vehicle, so cannot modify or sell it. If you wish to terminate the lease before the prescribed term is complete, you may have to pay a large sum of money depending on how long is left in the term.


To help you decide whether to buy or rent the car, you can work out the comparative benefits and costs using the Vehicle Loan or Lease Calculator provided by the Government of Canada.


Conclusion


As always, every case is different, so there is no one answer that can benefit everyone’s tax situation. However, we can establish some trends to follow and some ways to calculate the tax advantages you will receive depending on your circumstances.

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