17 December 2001 Internal T.I. 2001-0109207 - 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: An employee leased an automobile from his employer who in turn leased the automobile from an arm's length third party. The terms of the employee's lease agreement are identical to the terms in the employer's lease agreement.

Position: Are the standby rules applicable to such a situation?

Reasons: Yes. The standby provision applies where, in accordance with paragraph 6(1)(e) of the Income Tax Act, "the taxpayer's employer...made an automobile available to the taxpayer" and such is the case in the situation presented.

		December 17, 2001

	Ottawa Tax Services Office	HEADQUARTERS
	Ken Staple	Jacques E. Grisé
	Verification and Enforcement Division	957-2059

		2001-010920

Employee Payments for Leased Automobile

This is in reply to your e-mail of November 5, 2001, requesting our comments on your various observations relating to our letter of April 24, 2001 on the salary or wages that should be reported as employment income by employees of XXXXXXXXXX who participate in XXXXXXXXXX car lease program.

Your e-mail refers to the example wherein an employee's salary amounted to $95,000. A reasonable standby charge of $7,884 is calculated pursuant to subsection 6(2) of the Income Tax Act (the Act). The amount of $11,826 ($985.50 per month) is withheld from the employee's salary to reimburse the employer for the use of the automobile for which the reasonable standby charge is calculated.

You indicate that the reimbursement exceeds the standby charge by $3,942 ($11,826 - 7,884) and that "the taxpayer may focus on our admission that the employee paid $11,826 for the use of the car and ask how the excess $3,942 reimbursement by the employee should be treated". The amount reimbursed by the employee to the employer for the use of an automobile obtained from the employer is only significant in determining the employee's income from an office or employment pursuant to paragraph 6(1)(e) of the Act. Basically, the amount to be included in income pursuant to paragraph 6(1)(e) of the Act is the amount, if any, by which the reasonable standby charge computed under subsection 6(2) of the Act exceeds the total amount paid to the employer for the use of the automobile. Where the reasonable standby charge is less than the amount paid by the employee to the employer for the use of the automobile, there is no amount to be included in income pursuant to paragraph 6(1)(e) of the Act.

You indicate that the employee forgoes pre-tax salary of $11,826 in order to obtain the use of the car and that after-tax this represents a much smaller amount. From this statement you pose the question: "is it accurate to say that he paid $11,826 for the use of the car?" Your use of "pre-tax" and "after-tax" salary seems to be a reference to the employee's salary before and after the withholding of income tax since we assumed the use of the leased car was personal and, thus, no deduction in respect of the leased car is permitted in computing the employee's income from employment. An employer is, generally, required to withhold income tax on an employee's gross salary or wages less certain withholdings described in subsection 100(3) of the Income Tax Regulations, such as, registered pension plan contributions, union dues and certain premiums under a registered retirement savings plan. Since the withholding of amounts from an employee's salary in respect of the reimbursement for the use of a car obtained from the employer is not one of the items listed in subsection 100(3) of the Regulations, the amounts withheld are more aptly described as "after-tax" salary. Accordingly, in our view, the amount of $11,826 withheld from the employee's salary as a reimbursement to the employer for the use of a car would be an amount paid by the employee for the use of the car.

Finally, you state, "in my view, the standby rules shouldn't apply because the providing of the vehicle was contingent on the pay cut and the lease payments should therefore be taxed as salary". Basically, we are dealing with an employee who leased an automobile from his or her employer who in turn leased the automobile from an arm's length third party. The terms of the employee's lease agreement are identical to the terms in the employer's lease agreement. In accordance with paragraph 6(1)(e) of the Act, the standby rules apply "where the taxpayer's employer...made an automobile available to the taxpayer...". Since the employer in the situation we are dealing with made an automobile available to the employee, the standby rules apply, even though the amount to be included in income pursuant to paragraph 6(1)(e) of the Act will be nil because of the amount paid by the employee to the employer for the use of the automobile.

We hope our comments are helpful.

John Oulton, CA
Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate

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