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11650-1 (mm)
Sections 174 & 253
XXXXX
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Attention: XXXXX
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July 6, 1995
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Dear XXXXX
Thank you for your letter dated June 5, 1995, with enclosures, from XXXXX in which you request a confirmation of your interpretation of section 174 of the Excise Tax Act (the "ETA") in respect of input tax credits for motor vehicle allowance.
Statement of Facts:
In your memo you provide the following facts for our consideration:
• "A" Ltd. is a Canadian corporation and a GST registrant with approximately XXXXX commissioned sales employees and non-commissioned service employees.
• To compensate these employees for use of their personal vehicles, A Ltd. pays a per kilometre allowance.
• Amounts in respect of the allowance are deductible in computing A Ltd.'s income for income tax purposes.
• A Ltd.'s compensates their employees for using their personal vehicles in the course of their employment through a dual rate plan. Employees are paid a $0.45 per kilometre allowance for the first XXXXX kilometres driven in a particular month and $0.10 for each subsequent kilometre.
• Generally, the average annualized per kilometre allowance paid to the employees of "A" Ltd. fall within the guidelines set by Interpretation Bulletin IT-522 (i.e., $0.31 per kilometre for the first XXXXX kilometres and $0.25 per kilometre thereafter). However, the average annualized per kilometre mileage allowance paid to certain employees will be less than $0.25 per kilometre or greater than $0.31 per kilometre.
• Many of "A" Ltd.'s employees request that their employer complete the Taxation form T2200 after the end of each calendar year, to allow them to include the mileage allowances received in their personal income tax and to deduct an appropriate share of automobile expense.
At issue is whether it is reasonable for the person paying the motor vehicle allowance to consider the allowance to be reasonable for income tax purposes at that time it is paid and therefore claim an input tax credit pursuant to section 174 of the ETA.
DEPARTMENT'S POSITION:
The GST treatment of motor vehicle allowance is largely dependent upon the income tax treatment of the same. Section 174 of the ETA provides, among other things, that where a person pays an allowance for the use of a motor vehicle in Canada, in relation to activities engaged in by the person, an amount in respect of the allowance is deductible in computing the person's income for a taxation year and in the case of an allowance to which subparagraph 6(1)(b)(v), (vi) or (vii.1) of the Income Tax Act (the "ITA") apply if the allowance were a reasonable allowance for the purposes of that subparagraph and it is reasonable for that person to consider the allowance to be reasonable at that time it was paid, then the person is deemed to have paid tax equal to 7/107ths of the amount of the allowance.
It is our understanding that subsection 6(1)(b) of the ITA provides that all amounts received by a taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose are to be included in income, except if specifically exempted. Subparagraphs 6(1)(b)(v), (vi), (vii) and (vii.1) of the ITA exempt travel allowances in specific circumstances. Subparagraphs 6(1)(b)(x) and (xi) provide, for the purposes of subparagraphs 6(1)(b)(v), (vi), and (vii.1) of the ITA, that an allowance for the use of a motor vehicle shall be deemed not to be a reasonable allowance where the allowance is not based solely on the number of kilometres driven, or if the employee is reimbursed in whole or in part in respect to the use of the vehicle. Whether an allowance is reasonable for income tax purposes would involve a finding of fact to be determined on the basis of all the circumstances of a particular case.
For GST purposes, a motor vehicle allowance is treated as it were a reasonable allowance for the purposes of subparagraphs 6(1)(b)(v), (vi), (vii) and (vii.1) of the ITA if it is reasonable for the person paying that allowance to have considered, at the time that allowance is paid, that the allowance would be reasonable for those purposes. Therefore, the central issue to be addressed is whether it is reasonable, in the circumstances, for a registrant to believe that the allowance which they are paying to an employee would be reasonable for income tax purposes.
This reasonableness test for GST purposes is less stringent that the reasonableness test for income tax purposes since it must only be reasonable for the employer to believe that the allowance would be reasonable for income tax purposes. The GST criteria is less stringent in order to allow registrants to claim input tax credits in the reporting period in which they pay the allowance. In contrast, the determination of whether an allowance is reasonable or unreasonable for an employee is determined at the end of the employee's taxation year. Consistent with the income tax treatment and the consequential amendment to section 253(1) of the ETA, the GST reasonableness test applies on a case-by-case basis for each employee.
In the specific case under examination, A Ltd. is aware that although the payment of the allowance is reasonable for a majority of its employees, it will not be reasonable for certain employees. As a result, A Ltd. cannot simply apply the factor of 7/107ths to all of the motor vehicle allowances they pay since the company is fully aware that some allowances will clearly not be reasonable for income tax purposes for certain employees. For example, A Ltd. pays an employee, who drives their personally owned vehicle approximately 200 kilometres each month (2,400 kilometres in the year), an allowance of $0.45 per kilometre for the first 400 kilometres each month and $0.10 per kilometre thereafter. In this example, it would not be reasonable for A Ltd. to believe that the allowance would be reasonable since the total number of kilometres driven will result in a $0.45 per kilometre allowance, which exceeds the income tax guidelines. Therefore, A Ltd. would not be entitled to any input tax credits in respect of that allowance. However, the employee may be able to deduct certain motor vehicle expenses and therefore be eligible for the Employee and Partner GST Rebate. In contrast, if the employee traveled on average 1,000 kilometres a month, it would be reasonable for A Ltd. to believe that the monthly allowance of $240 ($0.24 per kilometre) would be reasonable for income tax purposes and to claim input tax credit on that amount (7/107ths of $240).
As you are aware, subsection 253(1) of the ETA provides that an employee is not entitled to the Employee and Partner GST Rebate in respect of expenses for which the employee has received an allowance unless the person paying the allowance certifies that they did not consider, at the time the allowance was paid, the allowance to be a reasonable allowance for the purposes of subparagraphs 6(1)(b)(v), (vi), (vii) and (vii.1) of the ITA. The fact that a person paying an allowance does not sign the GST form 370 is not, by itself, conclusive that it is reasonable for the person to consider the allowance as reasonable for income tax purposes. For example, an employer pays an employee a flat $500 per month car allowance to an employee. At the end of the taxation year the employee refuses to sign the form. Although the employer did not certify the GST form 370, the employer will not be entitled to the input tax credit pursuant to section 174 of the ETA since it is not reasonable for the employer to believe that the flat $500 per month car allowance would be reasonable for income tax purposes as the allowance is not based solely on the number of kilometres driven.
If you require further information, please contact Michael Matthews, A/Manager, ITC Unit, at (613) 952-8806, or Paul Lafond, the policy officer responsible for allowances, at (613) 954-9700.
Yours truly,
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
Excise/GST
GTP: XXXXX
| c.c.: |
M. Matthews
P. Lafond |
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