11 April 2001 External T.I. 2001-0075615 - EMPLOYEE'S VEH. EXP. EXCEEDING ALLOW.

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 an employee can claim motor vehicle expenses as a deduction from employment income on Form T777 if the tax-exempt allowance received by the employee is less than the actual motor vehicle expenses incurred by that employee.

Position: If an employee incurs reasonable business-related motor vehicle expenses that exceed the amount of the allowance received, we will accept that the allowance is unreasonably low and allow the employee to include it in income under paragraph 6(1)(b) of the Act.

Reasons: An allowance is not considered unreasonable merely because the employee's total motor vehicle expenses for business travel in the year exceed the total amount of motor vehicle allowances received in that year. (See paragraph 41 of IT-522R.) For example, an employee's motor vehicle expenses may exceed the total allowances received because the employee used a vehicle that was relatively more expensive to operate or because the employee had expensive vehicle repairs in a year.

  XXXXXXXXXX 	J. Gibbons, CGA
		2001-007561
April 11, 2001

Dear XXXXXXXXXX:

We are replying to your letter dated March 15, 2001, in which you enquired whether employees of the Canadian Food Inspection Agency (the "Company") can claim motor vehicle expenses for the use of their private motor vehicles for employment purposes.

As requested, we have considered the situation outlined in your letter and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. Thus, our comments are of a general nature only.

Facts

• Some of the Company's employees are authorized to use their own motor vehicles to fulfill operational requirements in accordance with the Federal Government's Travel Directive.
• The allowances are based on a per kilometre rate and are exempt from income tax based on Finance Canada's News Release 2000-096, "2000 Automobile Deduction Limits and Expense Benefit for Business."
• In some cases, an employee's actual operating expenses associated with the employment use of his or her motor vehicle may exceed the tax-exempt allowance received from the employer.

In relation to the foregoing facts, you enquire whether an employee can claim motor vehicle expenses as a deduction from employment income on Form T777 if the tax-exempt allowance received by the employee is less than the actual motor vehicle expenses incurred by that employee.

Our comments

An employee who receives a motor vehicle allowance is not permitted to deduct motor vehicle expenses under paragraphs 8(1)(h.1) of the Income Tax Act (the "Act") unless the particular 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 paragraph 6(1)(b) of the Act, 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).

Subject to subparagraph 6(1)(b)(x) of the Act, the reasonableness of an allowance paid to an employee is a question of fact. Subparagraph 6(1)(b)(x) of the Act deems an allowance not to be a reasonable allowance if it is not based solely on the number of kilometres driven for employment-related purposes. Generally, an allowance that is intended or designed to cover the employee's out-of-pocket costs for use of the vehicle in the course of performing the duties of employment, and that is based on a per-kilometer rate, would be considered a reasonable allowance.

In our view, an allowance is not considered unreasonable merely because the employee's total motor vehicle expenses for business travel in the year exceed the total amount of motor vehicle allowances received in that year. (See paragraph 41 of IT-522R.) For example, an employee's motor vehicle expenses may exceed the total allowances received because the employee used a vehicle that was relatively more expensive to operate or because the employee had expensive vehicle repairs in a year. On the other hand, if an employee incurs reasonable business-related motor vehicle expenses that exceed the amount of the allowance received, we will consider the allowance unreasonably low and allow the employee to include it in income under paragraph 6(1)(b) of the Act. Accordingly, the employee would be entitled to deduct motor vehicle expenses under paragraph 8(1)(h.1) of the Act if the other requirements of that provision are met.

We trust that these comments will be of assistance.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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