Transcript of Car Allowance vs. Company Car
Car Allowance vs. Company Car A guide on fleet leasing of corporate
vehicles vs reimbursing staff for personal vehicles.
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Leasing costs include far more than the lease fees. You must also
include interest, depreciation, maintenance and repairs, fuel, and
insurance—and then compare that total to the fixed or variable
reimbursement scheme, over the entire duration of a comparable
lease.
The value of vehicles is a key variable. It affects the capitalized
cost, fuel, maintenance and repair costs, and the estimated
depreciation in value over the lease term. Other important
variables include the financing terms, annual mileage, insurance,
and fuel prices.
When it comes to reimbursement costs, the variables include the
structure of the reimbursement agreement —is it fixed or variable,
or a combination of both—and the amounts to be reimbursed.
Lease your company vehicles, or reimburse? When you’re responsible
for providing your staff with their work vehicles, you face an
important choice: to lease the vehicles, or to reimburse staff for
the use of their personal vehicles. Which is best? This paper
outlines the costs and benefits.
To make a fair comparison, you should first determine all the
variables in each strategy, and then make a model of the financial
picture over time. In the example below, the costs for leasing,
fixed reimbursement, and variable reimbursement are compared month
after month.
The chart on the opposing page is in line with typical
fleet-leasing experience and assumptions: when realistic
reimbursement amounts are added up over time. The employer will
generally find that the costs of leasing soon cross the breakeven
point, and drop far lower than the costs of reimbursement. The
longer the vehicle’s usage life, the lower the relative costs of
leasing.
Lease or reimburse? There are many factors to consider
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$50,000
$40,000
$30,000
$20,000
$10,000
Cumulative Market Value Depreciation Expense
Cumulative Interest Expense
Cumulative Fuel Expense
Cumulative Reimbursement Expense (incl fees)
Cumulative Insurance Expense
Months in Service
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Get the real picture. Compare all-in lifecycle costs and
benefits
Individuals on reimbursement plans must negotiate their own
purchase price, and their personal loan or lease, usually with a
significant down payment.
Because fleet leasing corporations purchase many vehicles, they
have skilled buyers with established
relationships with vehicle manufacturers. They enjoy volume
pricing, plus manufacturer incentives and rebates. As a result,
they can typically acquire vehicles at lower cost, with better
financing terms than individuals can secure.
Cost to employer Cost to employee Difference
Factory Base Invoice $26,207 $28,699 ($2,492)
Freight, Air Tax $1,790 $1,790 $0
Manufacturer Allowance ($1,000) $0 ($1,000)
Dealer Markup $150 ($500) $350
Advertising $0 $200 ($200)
Licence $100 $100 $0
PURCHASE COSTS COMPARED: FLEET LEASE VEHICLE VS. INDIVIDUAL
PURCHASE
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A company car can be a powerful recruiting tool While some feel
that employees prefer to be reimbursed (because reimbursement lets
them choose their own vehicle), industry surveys show that
potential hires perceive a company vehicle as a valuable
benefit.
Reimbursement can actually be a hiring disadvantage. If a potential
hire’s current employer provides them with a company-supplied
vehicle, they will be forced to buy their own car—and pay the down
payment— which may make them reluctant to take the new job.
Statistics show employee turnover tends to increase when companies
change from company-supplied vehicles to a reimbursement program.
Fleet Financials reported switching to a reimbursement program
resulted in a 10 percent near-term turnover rate.
Maintenance and repair costs are lower for companies than for
individuals The purchasing power of fleet operators gives them a
network of repair and maintenance partners and drives costs down.
Savings that are passed on to their lease clients, through
maintenance programs that provide discount pricing on maintenance,
repairs, tires and labour. Since these maintenance and repair
charges are managed through the leasing company, record keeping is
accurate.
With leased vehicles, repair downtime is minimized, and (depending
on the contract) replacement vehicles may be provided, which keeps
employees on the road, and on the job. When employees are
responsible for their own repairs, they have been known to book
those repairs on company time, which puts them ‘on the clock but
off the job’.
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With company vehicles, appropriate insurance is assured
Reimbursement programs depend on the accuracy and honesty of
employees’ record keeping. It is well known that many employees
exaggerate their mileage in order to increase their reimbursement.
In fact, Fleet Financials reported on one fleet management company
that conducted a study
Some companies look the other way, assuming that any liability will
the driver’s problem. This is not the case. Legally, it is the
company’s responsibility to ensure that their drivers are correctly
insured when
with its lessees. They found that reported business mileage dropped
by 30 percent after the company switched from reimbursement to a
company-provided vehicle (based on recorded fuel card or
maintenance- sourced mileage).
on the job. If a driver is on company business without adequate
insurance, the liability generally falls to their employer. The
potential costs to the company can be significant.
Commercial-class vehicle insurance can be costly. Employees on
reimbursement programs can be tempted to save money and avoid the
full insurance, “hoping for the best”.
Factor in the risks. Including your company’s image and
standards
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Company vehicles ensure a strong, consistent image For sales or
service calls, when your people drive up for a client visit, the
vehicle they arrive in speaks volumes about your company. With a
reimbursement program, you have no guarantee that your people
will
be driving an appropriate vehicle for the job, or that the vehicle
is in a condition that reflects well on your company. A
company-provided, company-maintained vehicle protects your
corporate image.
Company vehicles are safer Reimbursement programs provide less
control over driver safety. When there is more flexibility in
vehicle requirements and parameters, some employees will try to
save money on their vehicle and pocket the difference from their
reimbursement program.
Company-provided vehicles, on the other hand, are equipped with the
latest safety features and technologies, and are selected for their
fitness to the task.
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It’s easier to manage ‘authorized drivers only’ rules with company
cars
Reimbursement programs have tax implications
The next decision?
With a company-provided fleet, it’s relatively easy to restrict
vehicle use to employees and authorized drivers, and/or to
confiscate vehicles from those who lose their licence. With
reimbursement programs, it’s
Employee reimbursement rates (per-kilometre amounts) are prescribed
in Section 7306 of the Income Tax Act. Reimbursement at these rates
is not considered “taxable income” for the employee. Amounts above
those proscribed by the CRA, or flat-rate allowances (or a
combination of per-kilometre and flat-rate allowance) are
considered a “taxable
If you choose to lease your company fleet, the next decision is
easy: contact Foss National Leasing. We offer cost-effective
leasing solutions that are custom designed to make your fleet work
for you, not the other way around.
far more challenging to control vehicle use and avoid potential
liabilities from unauthorized or unlicensed drivers driving on
company time.
benefit” to the employee and must be included in the employee’s
income.
The CRA guidelines can be complex. You should consult tax experts
when comparing the costs of leasing versus reimbursement.
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