Improper assessment of taxable benefits and allowances
Payroll can be a challenging job with dozens of laws to obey and rules to follow. One area that can present difficulties is taxable benefits.
"One of the most common compliance issues identified by the Canada Revenue Agency (CRA) and Revenu Québec in organizational audits is improper assessment of taxable benefits and allowances, or excluding taxable benefits from employment income," the Canadian Payroll Association said in a recent news release.
"In fact, on the most recent list of top 10 CRA audit adjustments, seven out of 10 of the most commonly requested adjustments to an employer’s payroll are related to taxable benefits not being correctly reported," it added.
Included on the list are the automobile standby charge and operating expense benefit for an employee’s personal use of an employer-owned or leased automobile. That is not a surprise for James Plett, client success manager at human capital management software provider PaySavvy in Vancouver.
"Most of our clients, big and small, agree that there are so many variables to consider and so many different ways of calculating both the standby charge and the operating expense that it is a pain to calculate and a pain to remember."
If an employee uses an employer-owned or leased automobile for personal reasons, a taxable benefit arises. The benefit is made up of two parts. The first is the standby charge, which is the benefit employees receive for having the automobile available to them or a person related to them, less any amounts they reimburse the employer for the benefit.
There are different ways to calculate the standby charge depending on whether the employer owns or leases the automobile and how much driving is for business versus personal reasons. The CRA explains the calculations on its website (www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/tmbl/bnfts/menu-eng.html) and in its Employers’ Guide - Taxable Benefits and Allowances (T4130).
The second component is the operating expense benefit, which is what an employee receives when an employer pays for operating expenses related to the employee’s personal use of the automobile less any amounts the employee reimburses the employer. This includes items such as licence, gasoline, washes, insurance and repairs.
The operating expense benefit is calculated using either a fixed-rate calculation or an optional calculation. For 2015, the fixed rate is 27 cents per kilometre of personal use (or 24 cents if the employee’s chief source of employment is selling or leasing automobiles).
With the optional calculation, payroll calculates the operating expense benefit at one-half of the standby charge before deducting any amounts the employee (or a person related to the employee) reimburses the employer. Payroll can only use the optional calculation when there is a standby charge included in the employee’s income, the employee uses the automobile mostly for business and the employee requests that payroll use it.
Another challenging issue is the calculations apply to only those vehicles the CRA defines as automobiles — motor vehicles that seat a driver and up to eight passengers and are designed or adapted chiefly to carry individuals on highways and streets.
Plett says some employers mistakenly assume that if the vehicle is not an automobile, they do not have to assess a taxable benefit for personal use. In fact, there is still a taxable benefit and it must be calculated using an estimate of the fair market value of the employee’s personal use.
Personal use
Another issue that can arise is knowing the difference between business and personal use. Personal use is any driving not related to work. It includes driving to carry out personal activities, vacation trips and travel between an employee’s home and regular place of employment.
The understanding can be complicated by the fact that, in some cases, driving from home to a regular place of employment may be business use rather than personal if an employer allows or requires employees to drive directly from their home to a point of call other than their regular workplace or to drive home from that point.
Plett says other exceptions can apply if employers need to provide their employees with transportation from pickup points to an employment location when public and private vehicles are not allowed or not practical for security or other reasons, or if the employer must provide transportation to an employee who works at a special worksite or a remote location.
Doing the calculations
Patricia Joncas, a payroll consultant with the Carswell Payroll Consulting Group in Toronto, says once payroll practitioners understand the rules for automobile taxable benefits, calculations are not that difficult to do.
"The CRA has available a taxable benefit online calculator for automobiles. The payroll department can use that to calculate the taxable benefit."
She says the biggest challenge comes from payroll departments not having enough information to do the calculations properly.
"That information is provided in the way of a logbook. The employer must receive it (from the employee) at year-end in order to reconcile the taxable benefit and make necessary adjustments for the T4 slip. Nobody has the time or wants to take the time to complete a logbook."
Plett agrees. "Sometimes, people don’t keep good records of the kilometres that they’ve driven or the days they have had the vehicle available for personal use so, at the end of the year, between T4s and year-end closing, the other thing (payroll departments) are scrambling to figure out is what the automobile benefit actually adds up to. I think one of the biggest problems is record-keeping in itself."
He says the problem sometimes arises because employers, especially small companies, may not even realize that giving an employee a company car constitutes a taxable benefit. "Year-end comes around and they find this out and they are shocked."
In other cases, says Joncas, it may be because employees do not understand the importance of keeping a logbook or are unwilling to do so. "The biggest culprits can be the executives. They don’t want to take the time and what they do is just provide an average and say, ‘Work with that,’ but there is no backup in the event of an audit."
Record-keeping critical
When it comes to taxable benefits, record-keeping is critical. The CRA requires employers and employees to keep records that help to distinguish between business and personal kilometres driven in a calendar year. Revenu Québec goes further.
It requires employees who drive an employer-provided automobile to keep a detailed logbook of their automobile use and to give a copy of the logbook to their employer. Employees must hand in the logbook within 10 days after they return the automobile or by Jan. 10 of the following year if the automobile was available to them on Dec. 31 of the current year.
Employees who fail to do so could face a $200 fine.
In the logbook, Revenu Québec requires employees to keep records of their business and personal use, including the total number of days the employer made the automobile available to them (or a person related to them), total kilometres driven on a daily, weekly or monthly basis and the specifics of their business driving (e.g., client location and number of kilometres travelled between departure point and client’s workplace).
To ensure employees use logbooks, Joncas recommends employers include the requirement in employment contracts or in company policy.
"In the employment contract have it defined: ‘We are going to provide you with an automobile. In turn, you are to provide us with this (logbook) by whatever date. If that logbook is not provided to the payroll department, we are going to tax you 100 per cent for the use of the automobile.’"
Some employers provide printed logbooks to employees to help them keep better records, but Plett thinks an even better idea would be to go digital.
"People will keep a Moleskine planner or whatever and they will track what days they used it or how many kilometres they’ve driven and they’ll shove this in the glove compartment (and forget it) and, at the end of the year, the records they keep aren’t actually that good," he says.
"The real key is having an app or something on your phone where you can actually keep track of these things. A lot of people are still using pen and paper when something digital and something more permanent would be a better solution."
Whichever recording method an employer chooses, the most important thing is to make sure that employees understand from the beginning why they need to use it and that they do use it.
"Tracking it on a regular basis, as with any taxable benefit, is really the thing to do because a year later it’s easy to forget about a thing and then it suddenly becomes a nightmare," says Plett.
"If you are proactive about it and, come December, you realize that the taxable benefit was actually greater than what you calculated it beforehand, you can make that adjustment (in the same calendar year) and it won’t really have any impact in the long run," he adds.
Joncas notes that reminders never hurt. "Come October, November, when payroll is dealing with the end of the year, send out a memo to your
employees," she says.
"Remind them that if they are claiming other than the basic exemption, they need to come in and complete a new TD1 form. If they have moved during the year, let payroll know your new address so that your T4 will make it to the right destination and, at the same time, remind them that if you have been provided with a vehicle to submit your logbook on such and such a date," she adds.
"Make it part of your year-end reminder because we need to send out reminders too."
