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 ISSUE:

What is the meaning to be given to the expression "cost of the automobile" for purposes of "C" in the formula in subsection 6(2) of the Act where a shareholder effectively pays for a portion of the CCPC's cost of the automobile since this will be the "cost" used to compute the automobile standby charge for a shareholder.

Position:

The "cost" to the CCPC is the amount paid for the automobile. Where a shareholder has effectively paid for a portion of the automobile, the cost to the CCPC is the original cost less the amount paid by the shareholder.

Reasons:

The cost of the automobile to the corporation is net of the amount debited to the shareholder loan account in those situations where the shareholder has included this amount in his/her income for tax purposes.

		January 15, 2001

	Toronto North TSO	HEADQUARTERS
	5001 Yonge Street, 6th Floor	A. Seidel, CMA
(613) 957-2058
	Attention: Albert Leung
		2000-005403

Automobile Standby Charge

This is in reply to your memorandum dated October 30, 2000 in which you requested our comments with respect to the following situation.

Background

1. XXXXXXXXXX ("Mr. A") is a shareholder of XXXXXXXXXX, a Canadian controlled private corporation (hereinafter the "CCPC"), within the meaning thereof in subsection 125(7) of the Income Tax Act (the "Act").

2. The CCPC purchased an automobile for $XXXXXXXXXX and recorded the acquisition in its books as follows:

	Debit - Fixed Assets	$ XXXXXXXXXX
	Debit - Shareholder's Loan - Mr. A	$XXXXXXXXXX
	Credit - Cash	$XXXXXXXXXX 

3. Prior to the above entry, the balance in Mr. A's shareholder loan account was XXXXXXXXXX.

4. The new debit balance in Mr. A's shareholder loan account was offset by the payment of a management fee to Mr. A. The CCPC made the following entry in its books:

	Debit - Management Fee - Mr. A	$XXXXXXXXXX
	      Credit - Shareholder's Loan - Mr. A	$XXXXXXXXXX 

No cash exchanged hands between Mr. A and the CCPC.

5. Mr. A filed his T1 tax return for the year and included the $XXXXXXXXXX Management Fee in his income.

6. All of Mr. A's other personal expenses that were paid for by the CCPC during the year were charged to his shareholder's loan account. The debit balance at the end of the year was offset by the payment of a "Bonus" to Mr. A. The entry in the books of the CCPC would have been similar to the following:

	Debit - Shareholder's Loan - Mr. A	$XXXXXXXXXX
	     Credit - Cash		$XXXXXXXXXX 

	Management Bonus - Mr. A	$XXXXXXXXXX
	     Credit - Shareholder's Loan - Mr. A		$XXXXXXXXXX 

Again no cash exchanged hands between Mr. A and the CCPC. The Management Bonus was included in Mr. A's income on his T1 tax return.

7. The CCPC added the $XXXXXXXXXX to its pool of fixed assets for capital cost allowance ("CCA") purposes.

8. For the purposes of subsection 6(2) of the Act, the CCPC computed Mr. A's automobile standby charge on the basis that the cost of the automobile to the corporation was $XXXXXXXXXX.

Issues

A. For the purposes of C in the formula in subsection 6(2) of the Act, what is the "cost" of the automobile to the CCPC, $XXXXXXXXXX or $XXXXXXXXXX?

B. Do the journal entries in the books of the CCPC support the fact that there is joint ownership of the automobile between the CCPC and Mr. A? Is a formal written agreement required? Can the taxpayer submit a written agreement now to reflect the intentions of the CCPC and Mr. A at the time of the acquisition of the automobile.

C. How do we deal with the $XXXXXXXXXX paid by the shareholder? Does the corporation have to report this amount in its income as a payment for the right to use the automobile? Does this reduce the automobile standby charge otherwise computed pursuant to subsection 6(2) of the Act?

North York TSO's Views

In summary, your views are set out below:

"Cost" of the automobile

• The journal entries in the books of the CCPC were all done at the time that the automobile was purchased. This signifies that the automobile was jointly owned by Mr. A and the CCPC. Alternatively, the charge to Mr. A's shareholder's loan account was Mr. A reimbursing the CCPC for the personal use portion of the cost of the automobile.
• Paragraph 13(7)(c) of the Act recognizes that a property can be acquired which has a business use and a non-business use and it deems the capital cost of the automobile to be the business use portion of the total cost for, amongst other things, CCA purposes. However, it is not applicable to subsection 6(2) of the Act.
• XXXXXXXXXX Accordingly, the standby charge will be computed on the basis that the cost of the automobile to the CCPC is $XXXXXXXXXX.

Joint Ownership

• The journal entries made at the time of the acquisition clearly support the stated intention of the CCPC that the automobile is jointly owned or that it has two uses, a business use and a non-business use.
• Notwithstanding the fact that the CCPC may have legal title to the automobile, Mr. A has an XXXXXXXXXX% beneficial ownership interest in the automobile.
• This joint ownership will provide the correct result for both subsection 6(2) of the Act and the future proceeds of disposition allocation between business use and non-business use.
• If the CCRA requires a written agreement, a small taxpayer is being penalized. We have previously accepted husband/wife partnerships without written agreements.

Is the $XXXXXXXXXX Income to the CCPC

• The $XXXXXXXXXX does not represent rental income for the right to use the automobile. A payment for a "right to use" may be a capital receipt to the CCPC.
• There are a number of questions which remain unanswered, such as: - if this is a payment for a right to use, is it for the life of the asset or for the life of the corporation? - is the entire payment included in income in the year received or over the life of the automobile? - what is the capital cost for CCA purposes?
• The payment represents a capital reimbursement which should reduce the capital cost of the automobile to the CCPC.

Conclusion of North York TSO

The purpose of subsection 6(2) of the Act is to calculate the value of the benefit that a shareholder enjoyed from the personal use of the CCPC's property. Paragraph 13(7)(c) should be applicable and will produce the fair and correct result for the standby charge calculation and for future gain or loss on disposition. The phrase "cost to the corporation" means the value the corporation gave up for the automobile.

Technical Applications Views

The October 24, 2000 e-mail from Rosemin Hussein to Albert Leung states the following:

The problem with the accounting entry is that, in the absence of an agreement under which the shareholder acquires an XXXXXXXXXX% interest in the vehicle from the corporation or the vehicle was purchased from the dealer in some form of joint ownership such that the shareholder agreed to pay XXXXXXXXXX%, there is no basis to reduce the UCC of the car by the $XXXXXXXXXX - there are no proceeds of disposition if the company still has full ownership of the car. If the argument is that the $XXXXXXXXXX is to be accepted as an amount paid as per 6(1)(e)(ii), then this is income in the corporation's hand just as rent on a building doesn't reduce the UCC of the building, it is rental income.

There should have been two entries:

fixed Asset $XXXXXXXXXX
Bank $XXXXXXXXXX
to record the purchase of the vehicle

shareholder loan                                                          $XXXXXXXXXX
income from employee use of vehicle		$XXXXXXXXXX 

As such, the standby charge is reduced (likely eliminated) by the amount paid by the shareholder but the corporation has an income inclusion of this same amount, the $XXXXXXXXXX it says the shareholder paid for the personal use of the car.

The treatment of this amount is no different than a reimbursement by an employee of a portion of operating costs of an employer-provided vehicle - i.e. reimbursement reduces the employee's operating cost benefit and reduces the expenses (fuel etc.) paid and, therefore deductible by the employee.

Basically, they have 2 choices - pay tax now on $XXXXXXXXXX in the CCPC or acknowledge the reality (whatever it is) and pay tax on the standby charge based on the actual cost of the vehicle.

At the end of the day, I look at this more from the perspective that Mr. X wants a Bentley and is trying to get CCA in his company on a portion of the cost. To simplify what the result should be, at the end of the day, you cannot avoid tax on a standby charge by offsetting against a management bonus. A standby charge is a non-cash benefit received by the employee, if he gets a bonus in a year and has access to a Bentley during the year, he should pay tax on both.

In the event that there is a "joint ownership agreement", in theory the standby charge should be based on the $XXXXXXXXXX cost to the company of its share of the vehicle. The shareholder can't argue that he only drives the XXXXXXXXXX % that he owns! There would be no 6(1)(e)(ii) reduction.

Our Comments

Cost and Ownership

By virtue of subsection 15(5) of the Act, the formula in subsection 6(2) of the Act is used to determine what is deemed to be a reasonable standby charge for the use of an automobile that is made available to a shareholder by a corporation. The formula includes under "C", the cost of the automobile to the corporation where the corporation owns the vehicle at any time in the year.

"Cost" and "capital cost" are not defined in the Act. Black's Law Dictionary defines "cost" as: "expense; price, the sum or equivalent expended, paid or charged for something". The Concise Oxford Dictionary defines "cost" as "price to be paid for a thing; be acquirable at, involve expenditure of". Paragraph 8 of Interpretation Bulletin IT-285R2 states the following with respect to "capital cost":

"The term "capital cost of property" generally means the full cost to the taxpayer of acquiring the property and includes:

(a) legal, accounting, engineering or other fees incurred to acquire the property;

and

(b) in the case of a property a taxpayer manufactures for the taxpayer's own use, it includes material, labour and overhead costs reasonably attributable to the property, but nothing for any profit which might have been earned had the asset been sold."

If the journal entries recording the acquisition of the automobile are any indication of the intentions of the parties, then Mr. A effectively paid $XXXXXXXXXX of the total cost of the automobile. The auditor has indicated that the $XXXXXXXXXX debit to the shareholder's loan account of Mr. A was recorded at the time the automobile was purchased, not at some later date, and that this debit amount was subsequently offset by the management fee reported by Mr. A in his personal income tax return. It is therefore our view that the automobile standby charge to be determined pursuant to subsection 6(2) of the Act would be computed on the basis that the "cost of the automobile to the corporation" is $XXXXXXXXXX.

Management Fee

The $XXXXXXXXXX credit to the shareholder's loan account of Mr. A was expensed as a management fee by the CCPC. Paragraph 29 of Interpretation Bulletin IT-119R4 confirms that dividends, salaries and bonuses qualify as bona fide repayments of a shareholder loan. Since Mr. A has included this amount in his income, it is our view that this is a bona fide repayment of the shareholder loan and therefore not income to the CCPC.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

John Oulton, CA
Section Manager
Business, Property & Employment Income Section III
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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