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Company Cars vs Car Allowance: Which Is Best for Your Company?
October 22, 2022 - 2 min read

Company Cars vs Car Allowance: Which Is Best For Your Company?

Many business owners believe that providing their employees with access to company cars so they may commute to work is the best option. However, some business owners are opposed to this viewpoint and would rather give their employees a car allowance.

There is a significant distinction between car allowance and company vehicle, despite the fact that both are excellent employee benefits. This article explores the advantages and disadvantages of the two options for your business,  as well as which one would be superior in a variety of circumstances.  

How company vehicles work  

A company car is a vehicle provided by an employer for both business and personal use. Many companies offer company cars for use by their staff. The vehicles are typically labelled, making it clear that they belong to the company and are not for personal use.  

As a business owner, you should consider whether corporate cars are a good idea for your business operation. The following are the pros and cons of providing a company car.  

Pros of providing a company car  

When you provide your employees with business vehicles, you have greater control than if they were driving their own cars. You may dictate what the employee can and cannot do with the vehicle. You can also manage staff insurance and vehicle maintenance. Also, it allows you to promote your brand without paying a third party. This enhances brand recognition while decreasing advertising expenses. In addition, offering this reward to your staff improves their motivation and productivity.

Cons of providing a company car  

There are possible disadvantages to providing vehicles to employees. Giving your staff access to company cars poses a big risk. You'll need additional liability insurance if the company car is involved in an accident. If a company car accident leads to a lawsuit, your company could face high legal bills.

Also, purchasing company vehicles involves considerable upfront expenditure, which can be difficult for small enterprises unless they lease instead. Other expenses include car replacement fees in case of theft or accident if insurance doesn't pay and hefty repair, maintenance, and service prices.  Although many are deductible, they might influence cash flow.

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How car allowance works 

A car allowance is a monthly payment granted to employees to cover automobile-related expenses  (purchase of vehicle or maintenance of personal vehicle). Contrary to business expenses, a car allowance is fully taxable. The following are the pros and cons of providing car allowance to employees.  

Pros of providing car allowance  

It can be an affordable option, especially if very few employees need to drive to work on a regular basis. Instead of investing in multiple vehicles, gas, insurance, etc., you only need to cover gas and mileage for the business-related trips. Employers may also choose to assist with registration and insurance costs to offset the extra use of the vehicle. In addition, employees don't need to track mileage or prove business-related spending. Also, you don't need more admin employees to handle insurance, checks, and mileage.

Cons of providing car allowance

Providing a car allowance comes with its own set of disadvantages, including tax implications. Car allowance is considered taxable compensation, which can result in tax liabilities for you and your employees.

This can be prevented by providing a mileage reimbursement scheme for work travel, normally based on a per-kilometre rate set by the CRA. This non-taxable benefit requires employees to maintain proper mileage logs and expense reports to be reimbursed. See the current CRA per-kilometre rate allowance for business-related driving.

What's better: company cars or a car allowance?  

Both company car and car allowance schemes have numerous benefits. While a company car gives you a significant recruiting edge, lets you manage your corporate image, and boosts your staff morale, the car allowance scheme is less expensive given that the business no longer covers all the workers'  automobile expenses. From what we've covered, it depends on your scenario.

Several factors should be considered when selecting whether to give staff a corporate automobile or cash allowance: Do you intend to retain the vehicle after the employee leaves? Do you prefer to have control over the vehicle's maintenance? Do you wish to get into a binding agreement? Long-term, a  car allowance is cheaper because the employee maintains the vehicle. If the employee leaves, it could be a waste of money. Providing a company car may be more expensive but safer.

You can claim tax deductions under both schemes by ensuring the car allowance is reasonable and keeping track of your employees' mileage and business-related vehicle use.

FAQ

Business owners can deduct the operating expenses incurred to operate company cars. This includes licensing and registration costs, fuel and oil, insurance, repairs, and maintenance costs.
An employee may use a company or employer-related car for non-work purposes. Personal use of an employer-provided car, whether owned or leased, is a taxable benefit to the employee.
Car allowance is considered reasonable if it is based on the number of business kilometres driven in a year, the rate per kilometre is reasonable and you did not reimburse the employee for expenses related to the same use of the vehicle.

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