An employer’s guide to car allowance
A company car can be a real luxury for both the business and employees. They’re a great perk to help recruit staff—and to help retain them too!
In some cases, a car allowance is an absolute necessity. Today, staff members need to travel further than ever for work purposes as face-to-face interactions are so critical in business—and Zoom calls simply don’t cut it.
Whatever your reason may be for getting a company vehicle, it’s worth knowing what a car allowance is and how it works. From understanding the calculations for an employee's individual car allowance to the potential tax benefits, it can help minimize any complications that come with company cars and managing a car allowance policy.
In this guide, we’ll give you all the knowledge needed to take advantage of car allowances in relation to company cars for business use.
What is a car allowance and how does it work?
A car allowance is a sum of money the business adds to the employee’s annual salary that allows them to either buy or lease a vehicle.
Whether your employee(s) buy a car or lease it is something that can be discussed between the company and the employee. It’s typically the employee who sources the vehicle themselves.
There are pros and cons to both buying and leasing employee cars. When buying a company car, you benefit from insurance costs decreasing over time but you pay a lot of money to buy the car upfront.
For leasing a car, there’s a small to non-existent down payment but insurance rates may end up being higher to cover gap insurance.
Car allowance can also help the employee pay for the costs of car maintenance, as well as insuring it and getting it checked and serviced. Car allowance is separate from mileage allowance and is something you may also want to consider in your car allowance program.
Since a car allowance is given to the employee to buy their own personal vehicle, they can also claim a mileage allowance when using the car for work purposes. A car allowance can help to cover general fuel costs, but claiming a mileage allowance in addition is good for business.
What does car allowance cover?
Before giving an employee a car allowance for their own car, it’s useful to know what it covers so that you’re giving your employee a realistic allowance amount.
Driving costs are key when calculating how much to offer. The cost of fuel, according to Consumer Reports, makes up around 24% of the overall costs of operating a vehicle.
If the car is necessary for work and not just for personal use, then there will likely be a certain amount of mileage expenses needed. This covers any driving that’s work-related and can vary in cost depending on the mileage and type of fuel consumed.
Wear and tear
Every car experiences wear and tear, so it’s usually included within the car allowance to help cover anything that needs a quick fix or general TLC–replacing tires, or fixing small dents or scratches.
There are other maintenance costs that can crop up every now and then such as replacing brake pads, oil changes, and more. This upkeep is critical to keep the car well maintained in order to improve its overall health and longevity.
Insurances, taxes, and depreciation costs
In the scenario that an employee needs the car for work purposes, then insurance and depreciation costs need to be reimbursed. All cars depreciate to some extent and taxes are, of course, inevitable.
What is the average car allowance amount?
The average amount of car allowance can vary depending on a number of factors, such as the employee and their position within the company. How much the vehicle is used for business and where the car will be located also influence the amount.
Regardless of how much allowance a business provides, it’s important that there’s a car allowance clause in the employee’s contract. Just like any other benefit or agreement made between the employer and employee, you need to put it in writing.
How to calculate car allowance for employees
The above averages may be helpful for estimating car allowance amounts, but how do you calculate your own employee’s car allowance?
As mentioned above, the cost of fuel, maintenance, taxes, and reimbursements all influence how much the car allowance will be. Here’s a step-by-step process to make calculating your car allowance easier so that it’s not time-consuming or a hassle to do.
1. Use a tool like the CRA’s car allowance rate calculator to calculate fuel costs.
There are many tools and softwares available online to calculate your fuel costs. One worth using is the CRA’s online calculator. It’s great for estimating fuel costs over a certain amount of time, whether it be daily, monthly or yearly.
2. CAA for car repair estimates.
The CAA is an established repair and maintenance company, providing emergency repair assistance to those across Canada. You can use their site to roughly estimate the car repair costs that might be needed—whether that’s the MOT or general servicing. Costs greatly depend on the make and year of the car.
3. Use a comparison site for car insurance.
Car insurance can vary greatly from one company to another and depends on what you want covered. It’s important, as a business, to protect yourself as much as possible. Using a site like ratehub or rates.ca can be helpful for finding what prices are available and what each one covers individually.
This might differ depending on the driver’s experience on the road, where they’re located, and other car expenses like the amount of business kilometres or fuel types.
4. Calculate depreciation and other fees.
And finally, make sure to consider depreciation in a vehicle too. This is one of the biggest expenses and differs depending on the type of car the employee picks. Whether it’s a new vehicle or used, as well as any damage that occurs and the amount of mileage it accrues over time.
There are plenty of free depreciation calculators online to utilize, such as this one.
Understanding mileage rates for car allowance
Mileage is the amount of distance the car covers over time and mileage rates are something that are necessary to consider.
Unlike a car allowance where you’re paying a certain amount for the car and its maintenance, mileage is usually a reimbursement that covers the cost of fuel as well as any wear and tear that may occur. The amount of CO2 emissions produced can also influence the charges on the vehicle.
Mileage rates in Canada
According to the CRA, for Canadian mileage rates, you can claim $0,61 per kilometre tax free for the first 5,000km driven as a private mileage allowance, and $0,55 per km for every kilometre after that. These rates differ depending on the province you live in and the total mileage being claimed. They are updated yearly. You can choose to use a different price-per-kilometre rate than the CRA rate, but most companies consider this the standard.
The differences for a company car vs car allowance
There are differences between providing a company car to your employee and giving them a car allowance. Which one is more beneficial or cost-effective?
It’s a question of responsibility. For car allowance, it’s the employee’s responsibility to find a vehicle and take care of its maintenance. In the case of a company car, the employer is responsible.
With a car allowance, the purchased car doesn’t belong to the company, whereas a company car does. There are pros and cons to each and it’s up to you to determine which option is best for your business needs.
For example, if you give your employee a company car and they no longer need it, there’s then the task of either finding someone else in the company who needs it or selling it. On the other hand, a car allowance means the employer can limit their involvement in finding and maintaining the car.
There’s also taxes to consider. Company cars can incur heavier tax payments than car allowances. It’s certainly worth calculating before you make a decision. .
So, is a company car or car allowance the best fit? Ultimately, it’s up to the company to decide what’s best for business. Company cars may be best when solely used for business, whereas a car allowance may be more suitable for those who will use the car privately too.
Pros and cons of car allowance
Just like all business expenditures, it’s worth weighing the pros and cons of doling out. That said, here are some of the advantages and disadvantages.
The pros of a car allowance
A car allowance is relatively easy to set up and calculate, as mentioned above. A major benefit of car allowance is that it is easier for employees and can help save time. The setup of this kind of system is that it’s straightforward. Once in place, you can simply add or remove car allowances as and when needed.
By providing an allowance for a car, your staff can have their own vehicle to travel to work. Not only that, but there may be travel needed for work that is easier to get to via car than via public transport.
For car allowances, you also don’t need to track mileage and deal with business expenses, unless you offer mileage on top.
The cons of a car allowance
Setting a car allowance amount might be more challenging when it comes to your individual employees. Some may be deserving of more allowance but at the same time, you want to ensure fairness for everyone within the organization.
Not all employees will need a car, and those who do may vary greatly in the mileage needed for work. It’s finding a happy medium that can often be the difficulty. Keeping your workforce happy and–more importantly–valued, is critical. Without this, you may find your staff are more inclined to leave—which isn’t great for business.
It really depends on what your business requires and can afford, every company’s finances differ.
Car allowance: frequently asked questions
To get a better understanding of how car allowance works, here are a few frequently asked questions that often crop up.
Is car allowance taxable?
In Canada, fixed monthly car allowances that cover your work-related car costs are taxed as part of your income.
If your employer pays car allowance as a per work kilometre rate that is either much higher or lower than the reasonable per-kilometre rate set by the CRA, the allowance will also be taxed.
But, if your employer follows the official CRA automobile allowance rate per km based on your actual business kilometres driven, your reimbursement will be tax-free.
Does company car allowance count as income?
A company car allowance is seen as a cash allowance and added to the employee’s annual salary. It’s a taxable income and is deducted from the salary just like national insurance, etc.
Again, there are tax deduction options available depending on how much the vehicle is used for business purposes and how much is for personal use.
As an employer, can I take away my employee’s car allowance?
As an employer, it depends on the terms and conditions in the employment contract. It’s worthwhile ensuring the terms are laid out in this contract from the outset. That way, if necessary, you can remove the employee’s car allowance without too many issues.
There’s a lot to consider when it comes to car allowance as a cash alternative for business so make sure to do your calculations correctly. By doing so, you can maximize the effectiveness of this benefit and enable your employees—and your business—to go places.