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11650-6(pl) XXXXX section 174
XXXXX
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Attention: XXXXX
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August 16, 1995
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Dear XXXXX
This is in reply to a memo dated June 28, 1995, from XXXXX of your office, requesting a clarification of the application of section 174 of the Excise Tax Act (the "ETA") as it applies to motor vehicle allowances.
Statement of Facts:
Our understanding of the relevant facts presented in the memo are as follows:
• XXXXX and XXXXX are part of the B XXXXX (the "company"), an oil field maintenance company;
• The company 's employees are required to use their personal vehicles for company business and accordingly, the company pays the following fixed (i.e., per diem) and per kilometre motor vehicle allowances to their employees:
1. For gas or propane vehicles (when the rig is working): XXXXX per day, and/or XXXXX per kilometre over 120 km/day (note that no amount is paid on a per kilometre basis on the first 120 km/day);
2. For diesel vehicles (when the rig is working): XXXXX per day, and/or XXXXX per kilometre over 120 km/day (note that no amount is paid on a per kilometre basis on the first 120 km/day);
3. For company business trips (non-rig ticket trips): XXXXX per kilometre for gas or propane vehicles and 15¢ per kilometre for diesel vehicles.
• The company is claiming input tax credits equal to 7/107th on the fixed and per kilometre motor vehicle allowances paid pursuant to section 174 of the ETA.
In his memo, XXXXX states that it is his understanding that the fixed amounts paid by the company to employees as motor vehicle allowances are deemed not to be reasonable allowances for income tax purposes and, accordingly, no input tax credits will be allowed to the company on those amounts. For your information, we recently wrote to the Director of the Business and General Division, Income Tax Rulings and Interpretations Directorate, for their views as to the reasonableness of the allowances based on the above-noted facts. In a memo dated August 9, 1995, (copy attached) Taxation responded to our letter stating, among other things, that the flat allowance is indeed "... an allowance that would be deemed not to be a reasonable allowance for income tax purposes by virtue of subparagraph 6(1)(b)(x) of the Act ...". Consequently, for GST purposes, we agree that the company is precluded from claiming any input tax credits on the fixed motor vehicle allowances paid to their employees pursuant to subparagraph 174(c)(i) of the ETA.
Having said this, the following questions are raised in XXXXX memo related to the per kilometre motor vehicle allowances paid by the company:
1. is the per kilometre motor vehicle allowance treated as a separate allowance and therefore the company will be entitled to an input tax credit?
2. are the XXXXX per kilometre rates reasonable amounts taking into account that no amounts are paid by the company on the first 120 kilometres per day?
3. are input tax credits only allowed on allowances paid at the XXXXX per kilometre rates?
4. is the combination of the two allowances considered unreasonable and therefore no input tax credits are allowed on any portion of the amounts?
THE DEPARTMENT'S POSITION
The GST treatment of motor vehicle allowances is largely dependent on its treatment for income tax purposes. Section 174 of the ETA provides, inter alia, 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 of the person for the purpose of the Income Tax Act (the "ITA"); and,
• in the case of an allowance to which subparagraph 6(1)(b)(v), (vi), (vii) or (vii.1) of the ITA apply if the allowance were a reasonable allowance for the purposes of that subparagraph, the person considered the allowance, at the time it was paid, to be a reasonable allowance and it is reasonable for that person to have considered, at the time, that the allowance would be a reasonable allowance for income tax purposes; the person is deemed to have received a taxable supply and to have paid, at that time, tax in respect of the supply equal to 7/107ths of the amount of the allowance.
For income tax purposes, paragraph 6(1)(b) of the ITA provides that any amount received by a taxpayer in the year as an allowance for personal or living expenses, or as an allowance for any other purpose, is to be included in the taxpayer's income for that year except where specifically exempted in that Act. Subparagraphs 6(1)(b)(v), (vi), (vii) or (vii.1) of the ITA (mentioned above), exempt travel allowances paid where certain circumstances exist. Moreover, subparagraph 6(1)(b)(x) and (xi) of the ITA provide that, for the purposes of subparagraphs 6(1)(b)(v), (vi), and (vii.1) of the ITA, an allowance for the use of a motor vehicle shall be deemed not to be a reasonable allowance where it is not based solely on the number of kilometres driven or where the taxpayer is reimbursed in whole or in part in respect to the use of the motor vehicle. As noted in the aforementioned letter from Taxation, whether an allowance is reasonable for income tax purposes becomes "a question of fact".
With this in mind, the central issue to be addressed in this case (which is advanced in the above questions for our consideration) is whether the various per kilometre motor vehicle allowances paid to employees are all treated as reasonable allowances for income tax purposes. Therefore, in answer to the questions noted above, we say:
1. Is the per kilometre motor vehicle allowance treated as a separate allowance and therefore the company will be entitled to an input tax credit?
Yes. For GST and income tax purposes (see attached memo from Taxation) the fixed motor vehicle allowance and the per kilometre motor vehicle allowance paid to employees who travel in excess of 120 kilometres per day are considered to be two separate allowances. With respect to the input tax credit entitlement to the company on the per kilometre vehicle allowance, please see the answer below to questions 2 and 3.
2. Are the XXXXX per kilometre rates reasonable amounts taking into account that no amounts are paid by the company on the first 120 kilometres per day?
3. Are input tax credits only allowed on allowances paid at the XXXXX per kilometre rates?
In their memo, Taxation has determined that, "... the allowance based on a per kilometre rate would appear to qualify as a reasonable allowance for the purposes of subparagraph 6(1)(b)(v), (vi) and (vii.1) of the Act.". As a result, since it is reasonable for the company to have considered all the per kilometre motor vehicle allowances to be, at the time they were paid, reasonable allowances for income tax purposes, the company will be allowed to claim input tax credits equal to 7/107ths of the amounts paid for these allowances pursuant to section 174 of the ETA.
4. Is the combination of the two allowances considered unreasonable and therefore no input tax credits are allowed on any portion of the amounts?
No. Again, these payments are considered to be two separate allowances. The fixed motor vehicle allowances of $65.00 and XXXXX per day are considered not to be reasonable allowances for income tax purposes since they are not based solely on kilometres driven by the employee. The company is therefore not allowed to claim input tax credits with respect of these daily flat allowances. However, for the reasons stated above, full input tax credits will be allowed on all the per kilometre motor vehicle allowances paid by the company pursuant to section 174 of the ETA.
If you require further information, please contact Michael Matthews, A/Manager, ITC Unit at (613) 952-8806, or Paul Lafond, the officer responsible for allowances at (613) 954-9700.
Yours truly,
H.L. Jones
Director
General Applications Division
GST Rulings and Interpretations
GTP: 1327 (REG)
Attachment
| c.c.: |
M. Matthews
P. Lafond XXXXX |
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