Paying Your Employee For The Use of Their Personal Vehicle, Per Kilometer
Employers often compensate their employees for the use of an employee’s personal motor vehicle by providing them with a car allowance or mileage allowance when they use their own vehicle for business.
On occasion, an employer may choose to reimburse an employee for gasoline consumed by the employee’s own vehicle, when they use it for business. However, a per kilometer rate tends to be the preferred compensation method.
A “reasonable” per kilometer rate that would be paid to an employee in Ontario is $0.55/km for the first 5000 kilometers and then $0.49/km after that. Compensating outside of these rates could be deemed “un-reasonable” in the eyes of CRA and would then become taxable to the employee - meaning that the employee would actually pay tax on the amount you're compensating them.
If the employer is gst/hst registered, the accounting of this payment to your employee is as follows to properly claim the imputed/ hst of the per kilometer rate. Ontario employers can claim an HST ITC (Imputed Tax Credit) equal to 13/113 of reasonable mileage reimbursements to employees. As an example - If an employee is to be paid at $0.55 /km for 100km - They would be paid $55.00. The employer can claim an HST ITC (Imputed Tax Credit) of $6.33 for that $55.00 payment (which is equal to $55.00 * 13/113). To simplify this equation, of the $55.00 paid to the employee the employer can claim $48.67 of the $55.00 as a business expense and the remaining $6.33 can be claimed as imputed GST/HST making the entire payment of $55.00 a business write-off. This method has no income tax implications to the employee, nor can the employee claim automobile expenses on their T1 tax return. The employer is simply paying the employee for the use of their own vehicle.
If the employer is not gst/hst registered, the $55.00 paid to the employee as calculated in the above example is only an expense. If you're not registered to collect gst/hst - you cannot claim an HST ITC (imputed tax credit).
Stay tuned for our next blog about the taxable car allowance for an employee owned vehicle; Where we will define “flat rate car allowances" and will outline the tax implications to the employee when this method is used.