This week we address a common question. It returns season after season, with the arrival of good weather which fuels a desire for renewal among car owners. This is precisely the question that Anne-Marie asked us: “In a few weeks, I am going to buy back my currently leased car, since the residual value is very advantageous. Currently, I pay for my car personally and my company reimburses me for business use. Should I take advantage of the fact that I am now a shareholder of a company (which was not the case at the time of the rental) to carry out this transaction so as to have this expense paid by my company ? »
Here, several angles will need to be examined to make an informed decision. I’ll give it to you in a thousand words: the answer may not be what you expect.
The kilometer register, a necessary evil
The most important variable — and it is crucial — in deciding this dilemma is the nature of the use to which said car will be put. Will the majority of kilometers traveled in a year be devoted to personal use or will they be reserved for conducting company business?
In the case of a personally owned car, as is currently the case for our reader, miles driven on company business are reimbursed at a per mile rate. This reimbursement is a deductible expense from the company’s income, and it is tax-free for the shareholder.
When the car is owned directly by the company, it is the kilometers traveled for personal use that must be noted. Expenses relating to the car are then paid by the company and are deductible from its income. But a taxable benefit must then be added to the shareholder’s remuneration, each year.
First point to clarify: you understand here that the travel register is imperative in both scenarios. Since Anne-Marie has been in business for a few years, she already knows her required usage percentage to calculate the rest (the number of kilometers traveled for business must be divided by the total number of kilometers traveled in a year).
Comparing apples to apples
Let’s assume that our reader spends 60% of her mileage on personal use and that she travels 24,000 kilometers per year. Currently, since she pays for her car personally, this means that her company-paid allowance is based on a total of 9,600 kilometers. According to current rates, she can therefore obtain a tax-free refund of $6,444.
As it changes its purchasing structure to commercial holding, how will that be different? Car payments will be made by the company and will reduce the company’s taxable profit. But our reader will then have to pay a taxable benefit for the 14,400 kilometers traveled for personal purposes, or $4,752.
In order to compare the net costs of the two options, taxation must be considered. In the first situation, the deductible expense for the business is less important than in the second scenario, but personal tax behaves in the opposite way and increases. The ideal is therefore to clearly calculate, with two distinct columns, the real cost of each option.
We should see, in the case before us, what is the effective marginal tax rate of the shareholder and also take into account the tax rate of the company (in particular, is the small business deduction s ‘applied ?). It is also necessary to ask whether the taxes saved by the company are higher than the additional taxes paid by the shareholder.
Always on a case by case basis
We must also consider more qualitative factors. Personal detention is much simpler, administratively speaking. The fact that our reader buys her car through the company means that all expenses associated with this automobile will have to be accounted for (gasoline, maintenance, etc.). In the case of a small business, this additional bookkeeping will be more burdensome than in the case of a business with an accounting department.
Finally, other financial elements must be included in the analysis. For example, with financing, borrowing rates may be higher or, to maintain lower rates, you may have to personally endorse the loan. The decision between renting and buying, always annoying for the individual, takes on increased importance when it comes to a business.
In the specific case of Anne-Marie, since we are talking about buying out a rental, we would need to know if she has the personal cash necessary to buy her car. If so, repurchasing it personally means that tax-free repayments for business use could allow you to increase your investments rather than repaying a loan, which seems to me an avenue worth considering. With the use of financing, company ownership may well be more advantageous.
So let’s conclude this: although many believe that company ownership of an automobile is always advantageous, this is not always the case. A call to your accountant is therefore always advisable before adding an F to your license plate.