6 February 2002 Internal T.I. 2002-0119397 - AUTOMOBILE ALLOWANCES

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:

Questions related to paragraph 18(1)(r) concerning an employer's deduction for automobile allowances provided to employees

Position:

General comments provided.

Reasons:

Paragraph 18(1)(r), related provisions in paragraph 6(1)(b).

		February 6, 2002

	Excise and GST/HST 	HEADQUARTERS
	   Rulings Directorate 	Randy Hewlett, B.Comm.

	Attention: Mr. Gunar Ozols
	               General Operations Unit
		2002-011939

Employer Deduction - Automobile Allowances

We are writing in response to your letter dated January 21, 2002, wherein you requested our opinion on several issues relating to an employer's deduction for automobile allowances paid to employees.

In your letter, you asked four specific questions with respect this issue. Our comments follow each of the questions raised.

1. "Where an allowance is unreasonably low, would the employer be permitted to deduct the allowance from income?"

Pursuant to paragraph 18(1)(r) of the Income Tax Act (the Act), an employer cannot deduct an amount paid or payable as an allowance for the use of an automobile by an employee in excess of a prescribed amount determined under section 7306 of the Income Tax Regulations (the Regulations). The restriction in paragraph 18(1)(r) of the Act does not apply where the employee is required to include the allowance in income.

As noted in paragraph 47 of Interpretation Bulletin IT-522R, Vehicle, Travel and Sales Expenses of Employees, dated March 29, 1996, where an employee receives an automobile allowance for travel expenses that is unreasonably low, the allowance is technically required to be included in income under paragraph 6(1)(b) of the Act. However, the CCRA will not insist upon its inclusion provided that no amount is claimed for travel expenses by the employee under paragraph 8(1)(h) or (h.1) of the Act. Because paragraph 18(1)(r) would not apply, the employer generally would be permitted to deduct the allowance in computing income.

2. "Where an allowance is unreasonably high, what portion, if any, would you allow the employer to deduct from income - no amount, an amount up to what is considered reasonable or the full amount? Would your response differ if the employee was required to take the full amount of the allowance into income and was entitled to deduct any eligible expenses?"

Where an allowance is unreasonably high, and included in the employees income under paragraph 6(1)(b) of the Act, the employer will not be restricted in the amount of a deduction by paragraph 18(1)(r). However, the employer may be restricted by section 67 of the Act where it can be demonstrated that the amount was not reasonable in the circumstances. Such a determination can only be made on the basis of the facts of a particular situation. If section 67 of the Act does not apply, and the employee includes the allowance in income under paragraph 6(1)(b), generally the employer would be entitled to deduct the entire amount of the allowance. Further, the employee may be entitled to deduct expenses in computing employment income under paragraph 8(1)(h) or (h.1) of the Act.

3. "Where an allowance is unreasonable in that it was either too small or too large for its stated purpose, would you consider that the allowance was still for the stated purpose but unreasonably low or high, or, would you consider that the allowance was, in fact, for a purpose other than the stated purpose?"

Whether an amount is an allowance for the use of an automobile is a question of fact. Generally, where an allowance that is unreasonably high or low is received by an individual in their capacity as an employee, the amount will be viewed as an allowance for the stated purpose unless it is evident that some other purpose was prevalent. If an unreasonably high allowance is paid to an employee who is also a shareholder of a corporation, there may be an argument, in a particular fact situation, that the amount was received in the individual's capacity as a shareholder. In such a case, the amount would be a taxable benefit to the individual under subsection 15(1) of the Act, and the corporation would not be entitled to any deduction pursuant to paragraph 18(1)(a) of the Act.

4. "Would your response to the above three questions differ if the allowance was a motor vehicle allowance to which one of subparagraphs 6(1)(b)(v), (vi) or (vii.1) of the ITA would have applied if the allowance had been reasonable?"

As noted above, the reasonableness of an allowance under the Act is a determination that can only be made with knowledge of all the facts of a particular situation. Although the prescribed limits in section 7306 of the Regulations are generally accepted as reasonable, those limits are not considered to define the term "reasonable" for provisions other that paragraph 18(1)(r) of the Act, such as subparagraphs 6(1)(b)(v), (vi) and (vii.1). For these provisions, an allowance that is designed to cover an employee's out-of-pocket cost to use a vehicle in the course of performing the duties of employment would be considered a reasonable allowance. As a result, there may be instances where an automobile allowance is restricted by paragraph 18(1)(r) of the Act in terms of the employer's deduction, but still may be considered reasonable for the purposes of subparagraphs 6(1)(b)(v), (vi) and (vii.1), and therefore excluded from the employee's income.

We trust our comments will be of assistance to you.

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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