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: The taxable status of motor vehicle allowances paid to employees in different situations.
Position: General comments provided.
Reasons: Question of fact.
Randy Hewlett, B.Comm.
XXXXXXXXXX 613-957-8973
2003-003222
September 15, 2003
Dear XXXXXXXXXX:
Re: Employee Motor Vehicle Allowances
We are writing in response to your letter of July 16, 2003, wherein you requested our opinion on the taxable status of motor vehicle allowances paid by your company to its employees in different situations.
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 will provide comments on the provisions of the Income Tax Act (the "Act") that generally apply to the taxability of employee motor vehicle allowances. In addition, we outline below our comments on the application of the Act to the various types of situations described in your letter.
The Act
In general terms, a reasonable allowance received by an employee for the use of his or her personal motor vehicle in connection with the duties of employment, may be excluded from employment income by virtue of subparagraph 6(1)(b)(v), (vi) or (vii.1) of the Act. The reasonableness of an allowance is a determination that can only be made with a knowledge of all the facts of a particular situation. As a general rule, however, an allowance that is designed to cover an employee's out-of-pocket costs for the use of the motor vehicle during the course of performing the duties of employment, is considered a reasonable allowance for purposes of paragraph 6(1)(b) of the Act. In addition, the limits in section 7306 of the Income Tax Regulations (the "Regulations"), which are prescribed for purposes of establishing employer deductibility of motor vehicle allowances under paragraph 18(1)(r) of the Act, are generally accepted as being reasonable for purposes of paragraph 6(1)(b).
For purposes of subparagraph 6(1)(b)(v), (vi) or (vii.1) of the Act, an allowance is deemed not to be a reasonable when:
- 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
- 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)].
Situation 1
An employee receives an allowance of $0.351 per-kilometre, with a minimum payment of $4.50 per day.
In this type of situation, provided the per-kilometre allowance otherwise meets the requirements of subparagraph 6(1)(b)(v), (vi) or (vii.1) of the Act, there should be no adverse tax consequences for the employee because a minimal daily amount is received. The basis for this position is that the minimal daily amount is nominal in light of the actual usage and is designed to compensate the employee for the actual expenses incurred in using the motor vehicle in connection with the duties of employment for that day.
Situation 2
An employee receives an allowance of $0.351 per-kilometre in one month and in another month receives a fixed amount of $185 plus $0.351 per kilometre.
When an employee receives both a flat-rate allowance that compensates the employee for any of the "same use" on which the reasonable per-kilometre allowance is based, the two amounts are, in essence, one allowance. Because the combined allowance is not based solely on the number of kilometres that the motor vehicle is used for employment purposes, it is deemed unreasonable by virtue of subparagraph 6(1)(b)(x) of the Act, and consequently, is included in the employee's income under paragraph 6(1)(b). In terms of a situation in which a reasonable per-kilometre allowance is received in months prior to a switch to a combined allowance arrangement, there should be a clear indication that the employee is switching from one allowance arrangement to another, otherwise the taxable status of the reasonable per-kilometre allowance received prior to the change could be tainted.
Situation 3
An employee receives an allowance of $0.361 per-kilometre for travel outside of the employment area and a fixed amount of $500 per month for travel within the employment area.
In a 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, 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, 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, and consequently, is included in the employee's income under paragraph 6(1)(b).
Situation 4
An employee receives an allowance of $0.361 per-kilometre for travel both inside and outside of the employment area, with a minimum of $4.50 per round trip.
The comments for Situation 1 above also apply in this situation.
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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