Reimbursement for Business Use of Personal Vehicles Model Year 2005 Update

PROTECTED Reimbursement for Business Use of Personal Vehicles Model Year 2005 Update A Study prepared exclusively for The of the Public Service of Canada by PHH Strategic Business Services February 2005 Operating Cost Update

Table of Contents Executive Summary...1 Methodology...1 Evaluation...1 Introduction to Study...3 Cost Component Determination...4 Assumptions...4 Vehicle Selection...4 Ownership Replacement Period...5 Vehicle Utilization...5 Methodology...5 Variable Expense Analysis...5 Fuel...5 Oil Changes...7 Tires...7 Maintenance...7 Fixed Expense Analysis...7 Depreciation...7 Sales Tax...8 Financing...9 Insurance...9 Registration and Licensing Fees...10 Miscellaneous...10 Summary Findings...111 Policy Recommendations...122 Summary Findings...122 Preferred Recommendation...133 Alternative Recommendation...144 PHH Arval 2005

Executive Summary PHH is pleased to assist in the evaluation of driver reimbursement rates by the. This update evaluates vehicle operating expenses within the framework of our initial study, Reimbursement for Business Use of Personal Vehicles, dated January 1999. Highlights of this update include: Model Year 2005 vehicle prices; incorporating prevalent manufacturer rebates and interest rates in determining overall depreciation and financing costs; updated fuel price data; and, reflection of expense differences for each Province and Territory with two approaches to operating costs: per diem plus per km rate; or straight per km rate. This report summarizes key assumptions and values, and presents recommended levels of reimbursement for consideration by the Transportation Board. Our intent is to provide the most up-to-date expense data so that reimbursement rates for the 2005 fiscal year can be appropriately established. Methodology We continue to present our findings in two alternative formats for reimbursement. We have recommended that the Joint Council adopt a reimbursement policy that recognizes the fixed and variable nature of the costs that individuals incur in owning and operating a motor vehicle. This approach has a fixed component that reimburses drivers for each day they use their personal vehicle on organizational travel, and a variable component that would provide reimbursement for the operating cost of each kilometer traveled. Recognizing that this is a departure from the typical simple cents per kilometer policy, we have developed a reimbursement schedule, by Province, that reflects the operating costs on a straight per-kilometer basis. Each approach is developed by deriving costs for three vehicle classes: compact, mid-size, and minivans. Costs are developed assuming an annual driving distance of 20,000 kilometers, and for ownership terms of both four and five years. Fixed costs include depreciation, taxes, financing, insurance, licensing and registration, and miscellaneous items. Variable costs cover fuel, oil, tires, and maintenance. Cost variations between Provinces are recognized, including adjustments that recognize the severe weather conditions in the Territories. Evaluation This year, the primary factors that have impacted the rates are higher fuel costs, increased prices on new vehicles, and slightly lower trade-in values. On the whole, the nationwide cost to operate an automobile increased approximately five percent over the 2004 values, from 43.2 to 45.6 cents per kilometer on average. Rates increased fairly uniformly across the country, but were significantly higher in the Yukon Territory (owing to higher fuel and insurance costs), and in Manitoba (fuel). Relatively lower increases were noted in Newfoundland and Ontario, due to substantive declines in insurance costs and (in Ontario) a relatively smaller increase in gasoline prices. In all other locations, rates increased by 2.0 to 2.5 cents per kilometer. Depreciation costs are higher by 0.8 cents per kilometer, reflecting the combined effect of lower resale return values and higher pricing on new vehicles. The continued prevalence of manufacturer rebates and financing incentives continue to influence consumer prices, and have served to significantly reduce used vehicle (tradein) pricing as well. Thus, we have continued to incorporate available manufacturer rebates in establishing the 2005 model year pricing. However, at the time of this update, fewer motor company rebates appear to be available than in past years. PHH Arval 2005 1

Gasoline prices are, on average, 10 cents per litre higher for this study period than when reviewed for the 2004 update. (We have not compared current pump prices to any of the interim pump price updates.) However, there was considerable variability in the increases across the country, with the range being 4 to 16 cents per litre. Finance expenses were up, a result of higher vehicle prices and lower trade-in values; interest rates this year were slightly lower than last year. Insurance costs were highly variable across the country, but without the outsized increases of previous years. Rates fell in six Provinces. Maintenance costs increased, particularly those relating to oil changes, adding approximately 0.25 cents per km to operating costs. The Preferred Recommendation suggests reimbursing for fixed costs on a per diem basis and for operating costs on a kilometric basis. Comparing Provincial rates to last year s recommendations, per diem reimbursement rates increased in most locations by up to $1.00 per day. As in past years, the differences in per diem rates are largely attributable to differences in insurance costs. Generally, where insurance cost changes were flat to moderate (Alberta, Manitoba, New Brunswick, Nova Scotia, Quebec, and Saskatchewan), the per diem rate went up by $0.25 to $1.00 per day. Where insurance costs rose significantly (British Columbia and all the Territories), the per diem rate increased by $0.75 to $1.00. For Provinces where insurance costs were found to have declined (Newfoundland, Ontario, and Prince Edward Island), the per diem rate rose $0.25. Variable kilometric rates increased in all locations, generally by 1.0 cents per km, and following local fuel price changes. The variable rate increased by 1.5 cents per kilometer in Prince Edward Island, by 2.0 cents per kilometer in Manitoba, and by only 0.5 cents per km in Newfoundland and Nova Scotia. In the Yukon Territory, higher fuel prices drove the variable rate up 2.5 cents per km. The Joint Council has preferred the approach taken in the Alternative Recommendation, with reimbursement based on a kilometric rate depending upon whether the employer or employee requested that the employee s vehicle be used. Changes to employee-requested rates mirror those for the Variable kilometric rate noted above. The combined full kilometric rates (for employer-requested travel) increased in every location; generally by 2.0 to 2.5 cents per km. Lower increases were noted only in Newfoundland (1.0) and Ontario (1.5). Higher increases were found in Manitoba (3.0) and the Yukon Territory (4.5). Across the country, recommended reimbursement rates generally range between 44.0 and 45.5 cents per kilometer. Higher rates are recommended in the Territories (owing to the added costs attributed to the severe weather conditions), and in Newfoundland and Quebec. Lower rates are found in Manitoba and Saskatchewan. PHH Arval 2005 2

Introduction to Study This study updates the vehicle operating costs within the same framework presented in our initial study for the Joint Council, Reimbursement for Business Use of Personal Vehicles, dated January 1999. That initial study included: an evaluation of the policy in place at the time, as well as the methodology used to develop the levels of reimbursement. a Benchmarking Survey of other organizations in Canada to sample the types of policies and levels of reimbursement in common use. a development of our proposed methodology and the resulting recommended levels of reimbursement. This cost and reimbursement recommendation update utilizes the methodology developed in our initial study. Specifically, we have developed costs for the various components of expense categories that are applicable to the ownership of personal automobiles. Certain costs are considered fixed they are incurred regardless of whether or (within limits) how much a vehicle is driven. These costs include: depreciation (the loss in value of a vehicle over time), financing, insurance, taxes, registration and licensing fees, and other small miscellaneous costs. Other costs are tied to the use of the vehicle. These variable costs are primarily for fuel and various maintenance items (preventive and unscheduled maintenance, and tires). In developing an operating expense analysis, variable expenses are typically calculated on a cents per kilometer basis, reflecting the activity base driving this cost. Fixed expenses are appropriately measured as a monthly or annual expense, since these costs are incurred regardless of distance driven. In general, fixed expenses are approximately two-thirds of the total operating cost. Where applicable, differences in these expenses between individual Provinces and Territories are recognized. Through each step, we have used information available in the public domain, as well as internal PHH data, expertise, and procedures. As with our initial study, our results are presented in two alternative approaches to reimbursement: a per diem plus kilometric rate approach; and a straight per kilometer alternative. For this year s update, we continue to track and apply manufacturers rebates to vehicle suggested retail pricing. The motor companies continue to be extremely aggressive with these rebates, and in the marketplace, this is believed to be a primary reason for the continuing decline in used vehicle resale prices. Beginning with the 2003 update, we started to incorporate manufacturers rebates on new vehicles in order to recognize their wide availability to all purchasers and to offset the significantly lower trade-in values that have been prevalent due to the aggressive new-vehicle rebates. Our view continues to be that applying manufacturer rebates to new car pricing more accurately reflects the current marketplace, and is a truer benchmark from which to subtract market wholesale prices in developing present operating costs. Even so, the following detail demonstrates that depreciation costs continue to increase on a year-to-year basis, consistent with what we are seeing in the marketplace as a whole. PHH Arval 2005 3

Cost Component Determination In this section, we present the assumptions and step through the methodology for determining the costs of the various expense components required to establish a rate of business use reimbursement. Overall, the basic approach is the same as described in our initial study. Here, we identify key changes and differences, and summarize our results. Assumptions The three key factors that drive the ultimate rate of reimbursement are the: vehicle selection; replacement period; and, distance driven, both annually and over the life of the vehicle. These factors are the main independent drivers of depreciation, the largest component of total operating costs, and establish key driving components in each of the other expense categories. Essentially, vehicle selection determines the initial cost, while the replacement period and distance driven are the key factors in determining the resale value. Vehicle Selection The type of vehicle assumed as the basis for determining the reimbursement policy will ultimately drive the level of reimbursement more than any other factor. We continue to evaluate costs for three vehicle classes: compact, mid-size, and minivan products. Final recommended rates are averages of the expenses for these three classes. For the current model year, the following table shows the nameplates and retail pricing that we employed. This pricing includes currently available manufacturer rebates. Product Class Representative Nameplates 2005 Model Year Pricing Compact Mid-size Minivan Chevrolet Malibu Chrysler Sebring Saturn ION Ford Taurus Chevrolet Impala Pontiac Grand Prix Saturn L300 Dodge Caravan Ford Freestar Pontiac Montana Chevrolet Uplander $ 23,475 $ 22,660 $ 21,990 $ 21,590 $ 26,505 $ 27,015 $ 26,070 $ 24,575 $ 24,480 $ 28,270 $ 24,680 The Chevrolet Uplander replaces the Venture in the Minivan category. In the compact class, the Grand Am is no longer offered as a sedan; we have added the Saturn ION. In the mid-size category, the Saturn L300 replaces the discontinued Dodge Intrepid. On average, these prices (including manufacturer rebates) reflect a 3.8% increase over 2004 pricing. PHH Arval 2005 4

Ownership Replacement Period We continue to use the average of four- and five-year ownership periods in developing our operating expenses. Vehicle Utilization The final key assumption in making operating cost determinations is the number of kilometers driven annually. We continue to assume an annual vehicle usage of 20,000 kilometers. This equates to odometer readings at trade in of 80,000 km at four years and 100,000 km at five years. We make no distinction between personal travel and vehicle use for business purposes in this annual use assumption. Methodology To review and summarize, our methodology involves determining fixed costs and variable costs for several assumed parameters: Vehicles are driven 20,000 kilometers annually. Costs are evaluated for ownership periods of both four and five years, and for representative nameplates in each of three product classes: compacts, mid-size, and minivans. Depreciation is determined by estimating a residual value (essentially the resale or trade-in amount) for a newly purchased vehicle, based on historic patterns for each vehicle class. Financing costs are based upon the net cost of a vehicle; the purchase price of the new vehicle less the resale value of the vehicle being sold. Taxes are determined at prevailing rates by Province on the net vehicle cost, and are amortized over the assumed ownership period. Licensing and registration expenses are determined on a Provincial basis and assume annual renewals. Insurance expenses are determined by Province, based primarily on the inflationary experience of auto policy premiums applied to policy rates used in previous years. Variable costs are based on current costs for fuel, oil change service, tires, and maintenance. Operating cost adjustments are made for the Territories, reflecting the severe operating conditions in those In the following sections, we summarize key thoughts for each cost component and review any significant items and/or changes. Variable Expense Analysis Variable expenses cover fuel, oil, tires, and maintenance. These expenses generally vary with the number of kilometers driven, and in the case of the Territories, the severity of the climate. Fuel Fuel generally represents the second largest expense of operating an automobile. Direct cost of fuel is determined by the cost per litre and the vehicle fuel efficiency. While the approach to determining these costs is unchanged from previous years, the values change with changes in both fuel economy and gasoline prices. In order to account for the severe operating conditions prevalent in the Territories, we have adjusted the vehicle fuel efficiency in computing fuel expenses for these locations. Our computations continue to reflect an eighty percent increase in the rate of fuel consumption on a litres per 100-kilometer basis. PHH Arval 2005 5

For the selected product classes, representative fuel efficiencies are given on the following table. Fuel efficiency (litres per 100 km) Product Class Compact Mid Size Minivan Provinces 8.92 9.75 11.83 Territories 16.06 17.55 21.29 These values represent fuel economy improvements in minivans, and declines in both midsize and compact cars, attributable to changes in motor company product offerings. Current representative fuel prices by Province are given, in cents per litre, on the following table. These represent pump prices for regular gasoline from late-november 2004 through late-january 2005. For reference, fuel pricing from previous years (although not for any interim fuel price updates) is also shown. Province/Territory Current Fuel Price 2004 Update Price 2003 Update Price 2002 Update Price 2001 Update Price 2000 Update Price Alberta 75.9 63.5 70.5 68.4 69.1 57.6 British Columbia 82.9 73.3 74.7 72.7 74.9 59.5 Manitoba 78.7 62.5 70.1 69.9 71.1 61.6 New Brunswick 84.2 76.9 78.3 73.1 79.5 65.2 Newfoundland 92.2 82.2 83.3 82.0 87.9 70.9 Northwest/Nunavut 93.7 89.9 92.0 85.7 80.1 72.2 Nova Scotia 84.0 76.4 79.7 74.5 81.6 67.2 Ontario 74.8 69.0 71.3 68.9 75.6 62.6 Prince Edward Is. 85.3 70.7 73.3 73.3 74.5 61.0 Quebec 81.4 74.0 75.6 74.6 80.9 67.7 Saskatchewan 80.2 70.2 76.5 74.9 74.7 63.8 Yukon 94.5 79.1 84.6 82.2 83.9 67.9 Current prices are higher than those from last year s update in all areas, due to the worldwide increase in the price of crude oil. Increases range from 4 cents per litre to as much as 15 cents per litre in some locations. In general, fuel prices must change by approximately 4.7 cents per litre in order to affect a change of 0.5 cents per kilometer in the reimbursement rate. As a result of the higher prices tabulated for this study, the contribution of fuel costs to overall reimbursement is up in all locations, equating to 0.5 cents per kilometer in New Brunswick, Northwest/Nunavut, Nova Scotia, Ontario, and Quebec, 1.0 cents per kilometer in Alberta, British Columbia, Newfoundland, and Saskatchewan, 1.5 cents per kilometer in Manitoba and Prince Edward Island, and 2.5 cents per kilometer in the Yukon Territory. The variation in these changes is much greater than we have normally seen, and is attributed to local differences in the supply of petroleum products. PHH Arval 2005 6

Oil Changes Oil expense is determined on the basis of a service interval of three months or 6,000 km. For the annual usage assumption of 20,000 km, the three-month interval controls. Evaluation of oil change costs across Canada shows and average price of $40 per service, an increase over previous years. Geographic price differences are not considered, as they would not have a material affect on the recommended reimbursement rate. The average per kilometer rate is 0.80 cents for all vehicle classes, an increase of 0.20 cents over the 2004 update. Tires Tire costs continue to be partially based on location, as the necessity of utilizing snow tires in the northern climes generally increases tire expenditures in these locations. Under normal conditions, we assume a tire replacement interval of 72,500 km. Per kilometer costs are then increased by fifty percent in the Territories and by twenty-five percent in each of the Provinces. This reflects exclusive use of all-season radials in the heavilypopulated southern areas of Canada, while allowing for increased use of snow tires to the north. Our evaluation shows average tire pricing to be approximately 7% higher than those of a year ago. Resulting tire expenses (by location) are therefore slightly greater than the 2004 update, with costs ranging from 0.66 to 0.80 cents per kilometer. These increased tire costs do not have a material affect on the overall operating cost recommendation. Maintenance We continue to utilize our in-house maintenance database to develop the cents per kilometer values used in the model. This permits us to develop maintenance costs for the different vehicle classes, and to show how these expenses increase with ownership term. In addition, we are able to make an estimate of the geographic variance in maintenance costs on the basis of the experience of our fleet clients. The following table shows our experiential costs by product type for four- and five-year ownership periods, as well as the range of per-kilometer costs across the Provinces, used in the analysis. Maintenance cents per All Canada Average Provincial Range kilometer Compact Mid-Size Minivan high low 4-yr ownership 2.47 2.29 3.12 3.07 2.35 5-yr ownership 2.92 2.70 3.68 3.62 2.77 On average, maintenance continues to account for slightly less than three cents per kilometer of the total operating cost, virtually flat compared to last year s study. The amount attributed to individual Provinces ranging from 2.6 to 3.3 cents per kilometer. Fixed Expense Analysis The fixed expense categories (depreciation, taxes, financing, insurance, registration, and miscellaneous) are calculated on the basis of dividing annual costs by 20,000 kilometers per year to get a cents per kilometer value. Depreciation As noted in the Introduction, our approach to calculating depreciation expense reflects changes in the nature of vehicle pricing in the consumer marketplace. This change involves including manufacturer rebates in determining new vehicle pricing since model year 2003. The prevalence and magnitude of these rebates has lowered the cost of acquiring most vehicle nameplates. These manufacturer incentives have also had the effect of depressing prices for used vehicles (trade-in values) as well. Our approach is summarized as follows: PHH Arval 2005 7

For each vehicle class, two to four representative nameplates are chosen. For each nameplate, prevailing price information is complied for each of the past five model years. For the 2005 model year, available manufacturer rebates are applied to suggested retail pricing. For each nameplate, estimated 4- and 5-year residual value percentages are developed from historic data. These represent the percentage of the original retail price that the vehicle would recover at wholesale when it is traded in. An average initial cost for each nameplate is calculated for the number of past model years in each ownership period. Total depreciation for each nameplate and ownership period is calculated by applying the residual percentage to the average initial cost. Depreciation expense in cents per kilometer is determined for each nameplate and ownership period, based on the assumed annual distance driven. Kilometric values for each vehicle class and ownership period are the average of the selected nameplates within the class. Pricing information is taken from the October 2004 Canadian Red Book and from PHH s vehicle pricing application, FleetSpecs. In all cases, factory suggested retail pricing is used for comparable models year-toyear. Published manufacturer rebates for model years 2003 through 2005 have been applied to suggested retail pricing. No attempt is made to quantify additional negotiated discounts that might be available. This approach defines depreciation as the expected loss in value of a vehicle over its term of ownership. We believe this best captures the actual financial effect of depreciation on the cost of ownership, and makes the appropriate distinction of depreciation from the vehicle financing issue. Summary depreciation costs are given in the following table. (For comparison purposes, values from the 2004 update are shown in parentheses.) Depreciation All Canada Average cents per kilometer Compact Mid-Size Minivan 4-yr ownership 16.1 (14.4 19.2 (18.9) 18.7 (18.0) 5-yr ownership 14.8 (14.2) 17.5 (17.0) 17.3 (16.2) The trend across each vehicle class and ownership period is to increasing depreciation costs. New car prices (including effects of motor company rebates) are up by almost 4% over the last year, an average vehicle price increase $900. Trade-in values declined somewhat, by an average of 2.8 percent of (average) original cost. The result of the combined changes is an increase in the average annual depreciation cost of almost $150, equivalent to a gain of 0.8 cents per kilometer. Depreciation costs account for the largest portion of automobile expenses, approximately 38% of the total. Sales Tax The sales tax component of vehicle operating costs varies by Province/Territory, and depends on the net sale price, the assumed ownership period, and on how the tax rates are applied. While these taxes are paid at time of purchase, they are often rolled into the financing transaction. Our assumption is that the computed sales tax is amortized over the total ownership period, and that the tax is computed on the net purchase price the new vehicle price less the trade-in amount. Tax rates are different in the various localities, and are applied differently as well. The Federal sales tax (GST) is applied to the net price in all Provinces at the applicable rate. Most Provincial taxes are applied to the price PHH Arval 2005 8

alone; some are stated as individual rates, others as a higher GST rate. Quebec and Prince Edward Island apply their tax rate to the price including the GST. The effective tax rates range from 7.0 to 17.7 percent. Calculations for this update reflect an increase in the Provincial tax in Saskatchewan, and the decrease in British Columbia; both to a 7 percent rate. Financing Costs to finance are based on the amount financed, rate, and term. As we are considering two ownership terms, the associated financing costs are based on loans of the same duration. Financing costs over the ownership term are summed and then spread evenly over that term. (Actual financing costs decrease over the life of the loan.) For the amount to finance, we assume that the purchaser finances the difference between the price of the new vehicle and the resale or trade-in value of the replaced vehicle. We also assume an in-kind replacement in terms of vehicle class, and do not consider geographical differences in financing rates to be significant. This year, in addition to surveying Canadian lending institutions, we have included available manufacturer financing rates. Because of market conditions, these rates are prevalent across all of the nameplates evaluated. Consequently, financing rates are based on an average of thirteen lenders and three manufacturers. These current new automobile financing rates average 5.93 percent for 48-month loans and 6.28 percent for 60-month loans. These rates are approximately 0.4 percent lower than in the 2004 update, reflecting generally lower rates offered by financial institutions and higher overall rates offered through the motor companies. Financing contributes 2.5 cents per kilometer to the total fixed costs. Overall financing costs are higher, even with the slightly lower rates. Increasing new vehicle prices combined with slightly lower resale amounts have resulted in an increase in the amount financed of just over $1,200. Compared to the 2004 update, financing costs have increased approximately 5.5 percent, which equates to approximately 0.13 cents per kilometer in additional fixed costs. Insurance Insurance costs continue to have a significant impact on the reimbursement rates. After several years that were notable for very large increases in insurance premiums, 2004 saw rates moderate and actually decline in many locations. Our approach this year continues to determine insurance premiums on base rates used in prior studies, adjusted for the price changes measured by Canadian Consumer Price Index (CPI) for automotive vehicle insurance premiums from Statistics Canada (www.statcan.ca). On average, over the past 12 months Canadian auto insurance rates have decreased by almost 2 percent. However, the changes varied quite substantially across the country, with increases of up to 9 percent in British Columbia, Manitoba, Quebec, Saskatchewan, and the Territories. Rates declined as much as 11 percent in Alberta, Newfoundland, New Brunswick, Nova Scotia, Ontario, and Prince Edward Island. The following table shows the annual premium rates used, by location, as the base rates for developing operating costs in this update. The percentage change over previous rates are noted Province/Territory Premium / % change Province/Territory Premium / % change Alberta $ 2225 / -2% British Columbia $ 1700 / 5% Manitoba $ 1525 / 4% Newfoundland $ 2175 / -7% New Brunswick $ 1800 / -3% Northwest / Nunavut $ 1250 / 9% Nova Scotia $ 1725 / -3% Ontario $ 2075 / -7% PHH Arval 2005 9

Province/Territory Premium / % change Province/Territory Premium / % change Prince Edward Is. $ 1650 / -11% Quebec $ 2300 / 2% Saskatchewan $ 1275 / 4% Yukon $ 1675 / 6% Overall, insurance costs fell slightly over the last year; by approximately 0.1 cents per kilometer to an average of 8.9 cents per kilometer. The contribution of insurance to operating costs ranges by Province from 6.2 to 11.3 cents per kilometer, with the increases this year typically around 0.25 cents per kilometer (in Manitoba, Quebec, and Saskatchewan), ranging up to as much as 0.5 cents per kilometer in the Territories. Rates fell in six provinces (Alberta, New Brunswick, Newfoundland, Nova Scotia, Ontario, and Prince Edward Island) by as much as the equivalent of 1.0 cents per kilometer. Registration and Licensing Fees Registration and licensing fees are established by each Province and are readily determined from the annual fees listed in the following table: Province/Territory Registration Fees Province/Territory Registration Fees Alberta $ 61 British Columbia $ 61 Manitoba $ 76 Newfoundland $ 140 New Brunswick $ 68 Northwest / Nunavut $ 78 Nova Scotia $ 117 Ontario $ 74 Prince Edward Is. $ 75 Quebec $ 320 Saskatchewan $ 87 Yukon $ 60 Fees are higher this year in Manitoba and fell in Nova Scotia. On average, registration contributes 0.51 cents per kilometer to the total reimbursement amount, ranging from 0.30 to 1.60 cents per kilometer by location. Miscellaneous Based on our internal expense reporting data for Canadian fleets, we continue to recommend a monthly allowance of $10 for miscellaneous vehicle expenses. This translates into a cost of 0.05 cents per kilometer for each vehicle class, Provincial location, and ownership term. This amount is unchanged from the initial study. PHH Arval 2005 10

Summary Findings Our summary findings on operating costs are shown on the following table. Recommendations and discussion are presented in the following section. Operating Cost (cents per All Canada Average Provincial Range kilometer) Compact Mid-Size Minivan high low 4-yr ownership 42.41 46.85 48.85 56.35 38.37 5-yr ownership 41.52 45.66 48.18 55.85 37.41 The variability in ownership term continues to be quite small, despite increasing differences in 4- and 5-year depreciation costs. The variation in product classes is fairly constant, although increasing. More significant are the cost differences between geographic locations. Overall operating costs are up by approximately 5.4% over the 2004 update. However, there continue to be significant changes within various cost categories. This year, insurance costs moderated for the first time in several years. All maintenance costs (including tires and oil costs) rose this year as well. However, higher depreciation and fuel costs were the dominant factors in the overall increase, with the variation in fuel price changes across the country the most notable reason for differences in recommended rate changes. PHH Arval 2005 11

Policy Recommendations Based on the cost category components and our evaluation of their variability, we continue to recommend that the adopt a Fixed and Variable Reimbursement Schedule. This approach recognizes that there are fixed costs to operating a personal vehicle that are incurred regardless of the distance traveled, and variable costs that are tied to the number of kilometers a vehicle is driven over a given time period. The essence of this proposed schedule is: a fixed per diem rate to reimburse daily fixed costs of owning an automobile; and a variable per kilometer rate to reimburse for the cost of operating an automobile. The details of this recommendation are presented below as our Preferred Recommendation. We believe that this recommendation most closely and equitably provides for the reimbursement of the actual costs of operating a vehicle. However, we do recognize that this is a departure from the current per-kilometer method of reimbursement. Indeed, the per-kilometer approach is commonly used by most organizations, as indicated by the results of our survey. Having compiled the expenses for each of the component cost categories, it is possible to develop several viable reimbursement schemes. Recognizing that there may be a comfort level with the more common per-kilometer approach, we also provide an alternative recommendation on this basis. This is presented as our Alternative Recommendation. We continue to base our recommended rates on the average operating costs for the compact, mid-size, and minivan product classes and for both four- and five-year ownership periods. We also continue to recognize the Provincial differences in the operating costs of vehicles. The costs by Province and Territory that we have developed are tabulated in the following sections. Summary Findings On average, overall nationwide operating costs have risen by just over five percent. The bulk of the increase is attributable to significantly higher fuel prices, and higher depreciation costs. Depreciation was driven up by both higher pricing on new vehicles and slightly lower returns on used vehicles at trade-in. This wider gap also leads to higher financing and tax costs as well. Increases were not uniform across the country, however, as local variation in gasoline prices was fairly significant. Maintenance costs rose, but not excessively so. Insurance costs moderated after several years of outsized increases, and actually declined in six of the thirteen locations. When evaluating the Preferred Recommendation, the per diem reimbursement rates represent the fixed costs. In general, these rose between $0.25 and $1.00 per day in all locations. The per diem rates range from $15.25 to $19.50 per day. The variable expenses are covered by kilometric rates, and rose in all locations by 0.5 to 2.5 cents per km, depending on location. These same variable kilometric rates apply to employee-requested travel under the Alternative Recommendation. The employer-requested rate is derived by adding the fixed costs to the variable rate. Here again, rates increased in all locations. Reimbursement rate increases ranged from 1.0 cents per km in Newfoundland to 4.5 cents per km in the Yukon Territory. Most common were increases of 2.0 or 2.5 cents per km, noted in nine of the 13 locations. Employer-requested rates ranged from 41.0 to 52.0 cents per km, and vary between 44.0 and 45.5 cents per km in most locations. PHH Arval 2005 12

Preferred Recommendation We recommend that the adopt a fixed and variable rate of reimbursement policy. This entails establishing, for each Province and Territory, a daily per diem rate and a per kilometer rate. An individual who is requested to use their personal vehicle for company travel would receive the flat per diem reimbursement for each day that they are on travel status. This per diem rate would reimburse the driver for the fixed costs of owning their automobile. In addition, the driver would receive reimbursement at the policy rate for each kilometer of travel that is business related to compensate for the true cost of operating the vehicle. We recommend that these policy rates be based on: the average costs calculated for the compact, mid-size, and minivan product classes; the average of costs calculated for both four- and five-year ownership periods; and recognizing the variations in cost from Province to Province, as discussed previously. We have developed the following reimbursement rate table that shows our recommended per diem and per kilometer rate for each Province and Territory. The per diem rate is derived by dividing the annual fixed expenses by 365. The per-kilometer rate represents the variable expenses as developed for each Province. Per diem rates are rounded to the nearest $0.25 while the per kilometer rates are rounded to the nearest 0.5 cent. For comparison purposes, the 2004 recommendations are shown as well. 2005 Preferred Reimbursement Schedule Location Per Diem ($ per day) Per Kilometer (cents per km) 2004 Values Per Diem/ Per km Alberta 17.75 11.5 17.25 / 10.5 British Columbia 17.00 13.0 16.25 / 12.0 Manitoba 16.50 12.0 15.75 / 10.0 New Brunswick 17.25 12.5 16.75 / 11.5 Newfoundland 18.50 13.5 18.25 / 13.0 Northwest 15.25 22.0 14.25 / 21.0 Nova Scotia 17.25 12.5 17.00 / 12.0 Nunavut 15.25 22.0 14.25 / 21.0 Ontario 18.00 12.5 17.75 / 11.5 Prince Edward Island 17.25 12.5 17.00 / 11.0 Quebec 19.50 13.0 18.50 / 12.0 Saskatchewan 16.00 12.0 15.00 / 11.0 Yukon 16.25 22.0 15.25 / 19.5 In instances where employees request that they be allowed to use their own personal vehicles on organizational business, we recommend that the Joint Council continue their current practice of reimbursing for variable expenses by using the per-kilometer rate, by Province, given in the above table. In the employee-requested case, there would be no per diem reimbursement. PHH Arval 2005 13

Alternative Recommendation We do recognize that our fixed and variable recommendation is a departure from the norm of a fixed reimbursement rate. The advantage to developing expense data in the fashion presented here is that the same information can be employed to establish a fixed rate. The basis of the rates recommended below is an annual driving distance of 20,000 kilometers. The following table lists the per kilometer reimbursement rates, by Province, that result from our analysis. As with the preferred recommendation, we suggest continuing the practice of reimbursing employee-requested personal vehicle use on the basis of variable expenses only. 2005 Alternative Reimbursement Schedule (cents per kilometer) Location Employee Requested Employer Requested 2004 Values Employee / Employer Alberta 11.5 44.0 10.5 / 42.0 British Columbia 13.0 44.0 12.0 / 41.5 Manitoba 12.0 42.0 10.0 / 39.0 New Brunswick 12.5 44.5 11.5 / 42.5 Newfoundland 13.5 47.5 13.0 / 46.5 Northwest 22.0 49.5 21.0 / 47.0 Nova Scotia 12.5 44.5 12.0 / 42.5 Nunavut 22.0 49.5 21.0 / 47.0 Ontario 12.5 45.5 11.5 / 44.0 Prince Edward Island 12.5 44.0 11.0 / 42.0 Quebec 13.0 48.5 12.0 / 46.0 Saskatchewan 12.0 41.0 11.0 / 38.5 Yukon 22.0 52.0 19.5 / 47.5 PHH Arval 2005 14