9 December 1999 GST/HST Ruling 13432 - Motor Vehicle Allowances and Input Tax Credit Entitlements

Dear XXXXX

This letter is in response to your letter of July 23, 1999, our conversation this summer, and your recent meeting here in Ottawa on November 16, 1999, with our representatives, including Steve Suttie of my Division, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to registrants members of the XXXXX and their input tax credit entitlements with respect to XXXXX per kilometre motor vehicle allowances.

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (CCRA).

Statement of Facts

Our understanding of the facts, the transaction(s), and the purpose of the transaction(s) is as follows:

XXXXX member employers will pay XXXXX per kilometre motor vehicle allowances to certain employees XXXXX for the business use their trucks in the field.

•   The full amount of the motor vehicle allowance will be reported on each employee's T4 Slip.

•   Employers will complete the employer declaration on form T2200 to enable the employees to deduct motor vehicle expenses.

•   XXXXX must maintain sufficient appropriate documentation to substantiate their motor vehicle expenses.

XXXXX registrant employers will be entitled to deduct the full amount of the allowance (i.e., XXXXX per kilometre) for income tax purposes.

Ruling Requested

You would like to know whether or not the registrant employers who are members of the XXXXX would be entitled to claim input tax credits in respect of the XXXXX per kilometre motor vehicle allowances provided to certain employees. In the case at hand, the entire motor vehicle allowance is to be included in the income of the employees.

Ruling Given

Based on the facts set out above, we rule that the XXXXX registrant employers would not be entitled to claim input tax credits in respect of the XXXXX per kilometre motor vehicle allowances provided to employees which are considered "unreasonable" for the purposes of subparagraph 6(1)(b)(vii.1) of the Income Tax Act (ITA).

Analysis

Section 174 of the Excise Tax Act (ETA) is a provision which deals with allowances. When an allowance satisfies the conditions under section 174 of the ETA, the person paying the allowance will be considered to have received a supply and to have paid tax in respect of the supply. Once the person is considered to have paid tax, that person, if a registrant, may be entitled to claim input credits in accordance with section 169 of the ETA, subject to the other requirements and restrictions with respect to input tax credits.

Since the application of section 174 of the ETA in the case at hand relies on the income tax treatment of a motor vehicle allowance, we consulted with Income Tax Rulings and Interpretations to determine whether or not the allowances in question would be considered "reasonable" for the purposes of subparagraph 6(1)(b)(vii.1) of the ITA.

Pursuant to subparagraph 6(1)(b)(vii.1) of the ITA, "reasonable" allowances for the use of a motor vehicle received by an employee (other than an employee employed in connection with the selling of property or the negotiating of contracts for the employer) from the employer for travelling in the performance of the duties of the office or employment are not included in computing the income of a taxpayer.

In response to our inquiry, Income Tax Rulings and Interpretations advised us that a motor vehicle allowance which is included in the income of an employee cannot be considered to be a "reasonable" allowance for the purposes of subparagraph 6(1)(b)(vii.1) of the ITA because if it were a "reasonable" allowance, subparagraph 6(1)(b)(vii.1) of the ITA would exclude it from income.

Given the response we received from Income Tax Rulings and Interpretations in regards to the "reasonableness" of the XXXXX per kilometre motor vehicle allowance for the purposes of subparagraph 6(1)(b)(vii.1) of the ITA, it is our position that the XXXXX registrant employers would not be entitled to input tax credits in respect of the "unreasonable" allowances included in the employees' income, since one of the conditions under section 174 of the ETA would not be satisfied.

Employees of XXXXX registrant employers would be considered to have received "unreasonable" allowances for the purposes of subparagraph 6(1)(b)(vii.1) of the ITA. These employees should be entitled to deduct amounts in respect of the use of their motor vehicles for ITA purposes. They could then file Employee and Partner GST/HST Rebate applications to recover the tax they have paid in respect of the use of their motor vehicles, in accordance with section 253 of the ETA.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to the CCRA's interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-7959.

Yours truly,

Adrien Venne
Director
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate