24 November 2000 Internal T.I. 2000-0050967 - DEDUCTION OF VEH. EXP.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether employees who receive a combination vehicle allowance consisting of a flat rate and a per kilometre rate can deduct vehicle expenses under paragraph 8(1)(h.1) without including the total of the combination allowance in income.

Position: No. Further, where an employee receives a motor vehicle allowance consisting of a per kilometre amount and a flat-rate amount, it is our view that the combined allowance will be deemed not to be a reasonable allowance pursuant to subparagraph 6(1)(b)(x) of the Act, since it is not based solely on the number of kilometres driven for employment-related purposes. However, the "Employer's Guide Taxable Benefits 1999-2000" states differently.

Reasons: Under paragraph 6(1)(b) of the Act, an employee who receives a motor vehicle allowance is not permitted to deduct motor vehicle expenses under paragraph 8(1)(h.1) of the Act unless the allowance has been included in income

		November 24, 2000

St. John's Tax Centre	HEADQUARTERS
	Office Examination	J. Gibbons
(613) 957-2135
	Attention: Claudia Spence
		2000-005096

Deduction of Vehicle Expenses

We are replying to your facsimile dated October 11, 2000, concerning the calculation of deductible vehicle expenses for an employee who receives 2 allowances for the use of his or her vehicle. We also acknowledge our telephone conversation (Gibbons/Spence) on October 31, 2000. As we understand it, you are of the view that employees are misinterpreting the instructions in Chapter 3 of the "Employment Expenses Guide" which state:

Sometimes, your employer will include an unreasonably low allowance as income on your T4 slip even though you do not want to claim any expenses. When this happens, have your employer complete and sign Part B of Form T2200, or get a letter from your employer stating that the allowance was unreasonably low. On line 229, deduct as an expense an amount equal to the allowance.

You question the practice that some employees have of deducting the offset described above (or actual vehicle expenses) when they have also received a non-taxable allowance for vehicle expenses that has neither been included in income nor deducted in calculating the amount of the offset (or vehicle expenses). You believe that both allowances should be taken into account when determining the appropriate deduction for vehicle expenses.

Our views

An employee who receives a motor vehicle allowance is not permitted to deduct motor vehicle expenses under paragraph 8(1)(h.1) of the Income Tax Act (the "Act") unless the allowance has been included in income under paragraph 6(1)(b) of the Act. Since, generally, a reasonable allowance received by an employee for the use of a motor vehicle in travelling in the performance of the duties of the office or employment is excluded from income under 6(1)(b), only where an employee receives an unreasonable allowance that is included in income will he or she be able to claim motor vehicle expenses under paragraph 8(1)(h.1).

In general terms, the reasonableness of any particular allowance referred to in subparagraphs 6(1)(b)(v), (vi), or (vii.1) is a question of fact. However, where the employee's total vehicle expenses for employment-related activities in a year exceed the total travel allowance received in that year, the allowance may be considered unreasonable. Thus, provided that the requirements of paragraph 8(1)(h.1) of the Act are otherwise met, the employee would be permitted to include the allowance in income and deduct his or her actual motor vehicle expenses.

Where an employee receives a motor vehicle allowance consisting of a per kilometre amount and a flat-rate amount, it is our view that the combined allowance will be deemed not to be a reasonable allowance pursuant to subparagraph 6(1)(b)(x) of the Act, since it is not based solely on the number of kilometres driven for employment-related purposes. Thus, the employee would be required to include the combined allowance in income, i.e., both the per kilometre amount and the fixed amount, and would be entitled to a deduction for actual vehicle expenses incurred provided they are otherwise deductible under paragraph 8(1)(h.1) of the Act.

We note that the T4130(E) Rev. 99, "Employer's Guide Taxable Benefits 1999-2000," sets out a different procedure which is inconsistent with our view above, i.e., it indicates that only the flat-rate portion of a combined allowance should be reported as taxable. The Agency recently announced a change to the procedure in T4130, starting January 1, 2001, which will bring it in line with our interpretation of the law as described above. If you need further assistance on the procedures to follow for assessing combined allowances, you may wish to contact the Individual Returns and Payments Processing Directorate. In any event, if an employee has received a combined vehicle allowance, the total of which has not been included in income, it is our view that the employee would not be entitled to deduct motor vehicle expenses under paragraph 8(1)(h.1).

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate

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