20 February 2003 External T.I. 2002-0176735 - COMBINED EMPLOYEE MOTOR VEHICLE ALLOW.

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: Whether a combined per-kilometre and flat rate allowance are deemed unreasonable by virtue of subparagraph 6(1)(b)(x) or (xi).

Position: Subsection 6(1)(b)(x) will not apply, but 6(1)(b)(xi) will apply to some employees.

Reasons: The flat rate allowance does not cover any of the same use on which the per-kilometre allowance is based, so 6(1)(b)(x) does not apply. 6(1)(b)(xi) applies because some employees also receive a reimbursement for expenses that are in whole or in part in respect of the same use on which the per-kilometre and flat rate allowances are based.

Randy Hewlett, B.Comm.

XXXXXXXXXX 613-957-8973
2002-017673
February 20, 2003

Dear XXXXXXXXXX:

Re: Combined Employee Motor Vehicle Allowance

We are writing in response to your letter of December 19, 2002, regarding your technical interpretation request on the above noted issue for employees of XXXXXXXXXX We also acknowledge additional information submitted in your letters of January 17 and 24, 2003.

In your correspondence, you described XXXXXXXXXX policy (the Policy) of paying the following allowances to employees for use of their personal motor vehicle in connection with employment-related travel:

(a) Executive Committee Members and Executive Directors - $XXXXXXXXXX flat rate per month for in-town travel and a per-kilometre allowance for out of town travel; and

(b) Directors and Corporate Controller - $XXXXXXXXXX flat rate per month for in-town travel and a per-kilometre allowance for out of town travel.

In addition, Executive Committee Members and Executive Directors receive up to $XXXXXXXXXX annually for vehicle registration and insurance. XXXXXXXXXX began including the combined allowance on each employee's T4 as of XXXXXXXXXX provides the employees with a signed T2200 "Declaration of Conditions of Employment" so that employment expenses can be claimed for use of their motor vehicles with respect to employment-related travel for which they have also received a taxable allowance.

The Policy states that an employee in receipt of a flat rate allowance will not be reimbursed for any in-town travel. Further, when an employee travels out of town they have the option of using their personal vehicle or may choose a different means of transportation, such as air. When an employee uses his or her vehicle for out of town travel, they receive a per-kilometre allowance. Your correspondence also notes that one particular XXXXXXXXXX employee, XXXXXXXXXX, filed a Notice of Objection with respect to the inclusion of the per-kilometre portion of the combined allowance in his income for XXXXXXXXXX. The Appeals Division at the XXXXXXXXXX Tax Services Office reassessed XXXXXXXXXX income tax return to exclude the per-kilometre portion. You now inquire whether XXXXXXXXXX was correct in including the combined allowance in income as a taxable benefit, or should it have only included the flat rate allowance.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following general comments.

Generally, any amount received by an employee as an allowance for personal or living expenses is included in income by virtue of paragraph 6(1)(b) of the Income Tax Act (the Act), unless one of the exceptions in the provision applies. For example, reasonable allowances for the use of a motor vehicle in connection with the duties of employment may be excluded by virtue subparagraph 6(1)(b)(v), (vi) or (vii.1) of the Act. However, for the purpose of subparagraphs 6(1)(b)(v), (vi) and (vii.1) of the Act, an allowance is deemed not to be a reasonable when:

(1) The measurement of the use of the motor vehicle for the purpose of the allowance is not based solely on the number of kilometres for which the vehicle is used in connection with the duties of employment [subparagraph 6(1)(b)(x)]; or

(2) The employee receives both an allowance in respect of the use of a motor vehicle and is reimbursed in whole or in part for expenses in respect of the same use (except where the reimbursement is in respect of supplementary business insurance or toll or ferry charges and the amount of the allowance was determined without reference to those reimbursed expenses) [subparagraph 6(1)(b)(xi)].

In our view, when an employee receives both a per-kilometre allowance and a flat rate allowance that covers any of the same use on which the allowances are based, the combined allowance is deemed unreasonable by virtue of subparagraph 6(1)(b)(x) of the Act and therefore, must be included in the employee's income. However, in the situation where an employee receives a reasonable per-kilometre allowance for business travel outside the metropolitan area in which the business is located and a flat-rate allowance that is only for business travel within the metropolitan area, it is our view that each allowance is considered separately in determining whether subparagraph 6(1)(b)(x) of the Act applies. As a result, if the per-kilometre allowance otherwise meets the requirements of subparagraph 6(1)(b)(v), (vi) or (vii.1) of the Act, it would not be included in the employee's income. However, the flat rate allowance is still deemed unreasonable by virtue of paragraph 6(1)(b)(x) of the Act and must be included in the employee's income, since it is not based solely on the number of kilometres for which the motor vehicle is used in connection with the duties of employment.

In our view, subparagraph 6(1)(b)(x) of the Act does not apply in the situation you described, since the flat rate allowance and the per-kilometre allowance are each for a separate use of the motor vehicle (i.e., in-town and out of town travel). However, for those employees who receive a reimbursement for vehicle registration and insurance (Executive Committee Members and Executive Directors), subparagraph 6(1)(b)(xi) of the Act would apply. Thus, for these employees, both allowances are deemed unreasonable because they were also reimbursed in whole or in part for expenses (i.e., vehicle registration and insurance) in respect of that same use on which the allowances are based. As well, we are of the view that the reimbursement of vehicle registration and insurance is a taxable benefit for these employees pursuant to subparagraph 6(1)(a) of the Act.

You should also note that an employee who receives any allowance(s) for the use of a motor vehicle in connection with the duties of employment that was not included in computing employment income for the year because of paragraph 6(1)(b) of the Act is not eligible to deduct motor vehicle expenses under paragraph 8(1)(h.1). Therefore, motor vehicle expenses are only deductible when both allowances are included in the employee's income (provided all other conditions under section 8 of the Act are otherwise met).

We trust our comments will be of assistance to you.

Yours truly,

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

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