Corporate vs. personal vehicle ownership for private enterprise.






Corporate vs. personal vehicle ownership for private enterprise.

If you are financing, leasing, or buying, what strategy works best to minimize tax and save money?



Every business needs an automobile, and the owner has a choice between registering the new vehicle under personal or business name. The perspective to pay with before-tax dollars from business account looks really attractive to the owner in a higher tax bracket.

The decision to go ahead with the company automobile purchase, however, could depend on many things that go beyond a simple calculation. In an example below, we examine what affects the total tax to be paid by the owner and the corporation together.

Our example will use the following given data:

- 45k car financed at 650.00 plus tax per month

- owner's overall total personal tax bracket of 25%

- 3k per year car insurance cost in case of personal ownership

- 3.5k per year car insurance in case of business ownership

- vehicle used for business 75% of the time in the year

- 4.5k plus tax cost of gas, maintenance, parking expense per year

- 30k kms are driven in total for the 12 month year

- Canadian Controlled Private Corporation is carrying active business in Ontario and its marginal tax rate is 15.6%



PERSONAL OWNERSHIP


COSTS:

The cost of leasing/financing:

[650.00 +13% (HST)] * 12 =

734.50 * 12 =

8,814.00


Insurance:

3,000.00

Operating costs - gas, maintenance, parking expense:

4,500.00 + 13% = 5,085.00

In case of personal ownership the personal use part of the costs has to be paid by owner's after-tax dollars. The 25% part of the costs in before-tax dollars will be:

(8,814.00 + 3,000.00 + 5,085.00)*.25/(1.00-0.25) =

16,899.00 * .25 / 0.75 = 5,633.00

Where 0.25 or 25% is the assumed personal tax margin for the business owner.

The remaining 75 % of the costs can be paid by the business with before-tax dollars:

16,899.00 * 0.75 = 12,674.25

Total cost expressed in before-tax dollars is: 5,633.00 + 12,674.25 = 18,307.25



SAVINGS:


The following tax savings will apply:

(1)
Business portion of lease or financing, gas, licensing, insurance, maintenance and other operating costs.

Lease/financing costs: 650.00*12*75% = 5,850.00 Insurance: 3,000.00*75%=2,250.00

Gas, licensing, maintenance, parking expense: 4,500.00*75% = 3,375.00

Assuming that the business is a Canadian Controlled Private Corporation engaged in active business in Ontario its marginal tax rate will be 15.6%.

Therefore totat tax savings equal to: (5,850.00 +2,250.00 + 3,375.00)*15.6% = 1,790.10


(2)
Business portion of HST paid on the above expenses can be claimed.

650.00*12*13%*75% = 760.50

4,500.00*13%*75% = 438.75

Total HST claimed back is: 760.50 + 438.75 = 1,199.25

Conclusion:

Net annual cost associated with personal ownership: 18,307.25 - 1790.10 - 1,199.25 = 15,317.90



CORPORATE OWNERSHIP


COSTS:

The cost of leasing/financing:

[650.00 +13% (HST)] * 12 =

734.50 * 12 = 8,814.00

Insurance:

3,500.00


Operating costs - gas, maintenance, parking expense:

4,500.00 + 13% = 5,085.00


Standby Charge and Operating Cost Benefit.

In case of corporate-owned vehicle, the following additional taxable income increase for the owner will apply:

Standby Charge and Operating Cost Benefit will have to be included in income of the owner. These additions to personal taxable income are made since the owner receives the benefit of using company vehicle.

Read more on the topic:

http://www.taxspecialistgroup.ca/public/taxPerspectives.asp?art=56&site=tsg

http://en.planiguide.ca/tax-planning-guide/section-5-employees/taxable-benefits/

http://www.taxtips.ca/smallbusiness/automobile-standby-charge-benefit.htm



Standby Charge calculation:

[2/3 * (annual leasing cost + tax)] * [Personal kms / (1667 * No. Of months)]

(2/3*8,814.00)*(7,500/20004)=2,203.06

Operating Cost Benefit calculation

50% of Standby Charge: 2,203.06/2 = 1,101.53

Total taxable benefit for the business owner: 2,203.06 + 1,101.53 = 3,304.59

Additional benefit means additional tax for the owner, with assumed marginal tax of 25% , the owner will face additional 826.15 tax bill.

3,304.59 * 25% = 826.15

To keep the owner's income constant, there needs to be salary increase to cover that additional cost. In before-tax dollars the salary increase should amount to:

826.15 / (1 - 0.25) = 1,101.53

That is additional cost due to Standby Charge and Operating Cost Benefit.

Total cost expressed in before-tax dollars is:

8,814.00 + 3,500.00 + 5,085.00 + 1,101.53 = 18,500.53



SAVINGS:


The following costs can be deducted:

(1)
Full amount of lease or financing, gas, licensing, insurance, maintenance and other operating costs paid by the business.

(650*12) + 3,500 + 4,500 = 15,800.00

(2)
Additional salary of 1,101.53 paid to the owner to cover personal tax increase due to taxable benefits can also be deducted to reduce corporation's tax.

Assuming 15.6% marginal tax rate for Ontario Private Corporation the above deductions will generate tax savings amounting to:

(15,800.00 + 1,101.53) * 0.156 = 2,636.64

(3)
Full amount of HST paid on the above expenses can be claimed.

650.00*12*13% = 1014.00

4,500.00*13 = 585.00

Total HST claimed back is: 1014.00 + 585.00 = 1,599.00

Conclusion:

Net annual cost associated with corporate ownership: 18,500.53 - 2,636.64 - 1,599.00 = 14,264.89



CONCLUSION:

This example shows that the tax savings associated with corporate ownership vs. personal ownership when business use is 75% equal to:

15,317.90 - 14,264.89 = 1053.01

What will happen if business use is 60 %, or 40 %? Below are the three Excel spreadsheet tables, that show calculations for the eaxmple above, where business use is 75%, followed by calculations for business use of 60% and then 40%. From these calculations we see that in the second case the tax savings are 1,938.01, and 2,227.61 in third:


When business use of vehicle is 75%




When business use of vehicle is 60%




When business use of vehicle is 40%



Note that Standby Charge and Operating Cost Benefit calculation rules change once business use falls below 50%. Standby Charge can not be reduced by proportion of personal kms, and Operating Cost Benefit is calculated according to c/km method instead of 1/2 of Standby charge.


The above is a general example and a subjective view of the author(s) relying on arbitrary assumptions. Your business conditions may be different.
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Important notice(1): The information above may reflect a subjective interpretation by the author(s), who, by no means may accept any responsibility or liability whatsoever for the results of proper or improper use of the above information, whole or in part, it as well is explicitly stated that whatever information provided by authors, may not suit specific purpose of specific reader, and it alone may not be relied upon to produce decision. In each individual case professional advice must be obtained.

Important notice(2): This text is subject to copyright (c) legislation and may not be reproduced, whole or in part without author(s) written permission.