31 May 2001 External T.I. 2001-0075355 - STANDBY CHARGE

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:

1 - How is the gain or loss on the disposition of a company leased vehicle handled for the purposes of the standby charge?

2 - Do the leased costs used in determining the standby charge include PST and GST?

3 - Can a standby charge be reduced when an employee is on vacation and the leased vehicle and car keys are stored at the worksite?

Position:

1 - General discussion

2 - Yes.

3 - Depends on the circumstances.

Reasons:

1 - Depends on who disposes of the vehicle and the terms of the lease.

2 - See changes to paragraph 6(1)(e.1) and subsection 6(7) applicable to the 1996 and subsequent taxation years.

3 - If the vehicle and keys were required to be returned by the employer during the employee's holidays, the days would not be counted in the "total available days".

XXXXXXXXXX 2001-007535
J. E. Grisé
May 31, 2001

Dear XXXXXXXXXX:

Re: Standby Charges

This is in reply to your letter of March 15, 2001, requesting our opinion on various questions relating to the calculation of the standby charge pursuant to subsection 6(2) of the Income Tax Act (the Act).

The income tax consequence on the standby charge, if any, of a gain or loss from the disposition of a company leased vehicle will depend on the terms of the lease as well as the circumstances relating to the disposition of the vehicle.

Certain leases provide for the disposition of a leased vehicle by the lessor subsequent to the termination of the lease. Where the proceeds from such a disposition exceed a predetermined value at the end of the lease, the excess is refunded to the lessee. Where the predetermined value exceeds the proceeds, the lessee is charged for the excess. The excess refunded is sometimes referred to as a "terminal credit" while the excess paid to the lessor is referred to as a "terminal charge".

A terminal charge is added to the lease costs in the year the lease terminates. Alternatively, where certain conditions are present, the charge may be prorated over the lease and the T4 information slips of those individuals who used the vehicle are amended to reflect the increased standby charge. The latter may only be used if both the employer and the employees agree and none of the relevant years are statute-barred (i.e. the employee returns may be reassessed). A terminal credit may similarly reduce the lease costs for purposes of the standby charge.

Where a lease provides for the disposition by the lessor and a corresponding credit or charge to the lessee and the lessee purchases the vehicle for the predetermined amount at the end of the lease, we will consider the gain or loss from the subsequent disposition by the lessee as a terminal credit or terminal charge. This will only apply if the vehicle is disposed of soon after it is acquired. A disposition could include the transfer of a vehicle to an employee. The transfer of a vehicle to an employee at less than the fair market value of the vehicle will result in a taxable benefit to the employee.

A leased vehicle may be acquired at the end of a lease and used in the business of the former lessee in lieu of being disposed of. In such a situation, it will be a question of fact as to whether the gain or loss on the ultimate disposition of the vehicle will result in an income or capital gain or loss.

Prior to 1996, the Act required an additional amount to be added to the income of an individual equal to 7% of the value of the standby benefit net of any applicable provincial sales tax in respect of the amount payable for the purpose of leasing a vehicle. For 1996 and subsequent years, instead of a separate add-on of a Goods and Services Tax (GST) component of the standby charge benefit, the standby benefit amount to be included in income is determined inclusive of the GST paid by the employer for the lease which gives rise to the benefit. The standby charge includes any GST and provincial sales tax (PST) actually payable by the employer as well as such tax that would have been payable but for the fact that the employer is exempt from the payment of the tax because of the nature of the employer or the nature of the use of the property.

Paragraph 11 of interpretation bulletin IT-63R5 states that the expression "total available days" includes the first day during which an automobile is made available to an employee, or to a person related to the employee, and each day thereafter until such time as the employee is required by the employer to return the automobile and the control over its use to the employer or a person related to the employer.

You are particularly concerned about the application of the above statement to a situation where an employee goes on vacation and leaves the leased vehicle he or she uses and related car keys at the employer's worksite. Where, in the above situation, the employer requires the employee to leave the vehicle on company premises and surrender the car keys, the days should not be counted in the total available days since "the employee is required by the employer to return the automobile and the control over its use". On the other hand, the days when the automobile is left on company premises at the employee's discretion should be counted in the total available days.

We hope our comments are helpful.

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

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