4 February 2004 Internal T.I. 2003-0035061I7 - Automobile stand-by charge; taxable benefit in US

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.

Principal Issues: Where US subco pays for car lease of Canco's employee while in the US, who should issue the reporting slip and should it be a T4 or T4A? Also, what is the appropriate foreign exchange rate?

Position: Canco must issue a T4. A reasonable exchange rate should be used.

Reasons: Regulations 200(2) and 200(3). No fixed rules for exchange rate calculation.

		February 4, 2004

Ms. Suzanne Sauvé		Eliza Erskine
	Edmonton Tax Services Office
	9700 Jasper Ave., Suite 10
	Edmonton, AB
			2003-003506

Automobile Benefits Provided by US Corporation to Canadian Resident

This is in reply to your email of August 19, 2003, asking us about the reporting requirements with respect to a Canadian employee of a Canadian corporation ("Canco") who works in the United States for an associated corporation ("USco") that provides him with a leased vehicle for both business and personal use. You discussed this matter with us by telephone on August 25, 2003 (Cook/Sauvé) and asked us for a written response because Canco expects to have a number of employees in this situation. We apologize for the delay in providing the written response.

Facts

Canco employs a Canadian resident to work in the United States. The employee is paid from Canada in Canadian funds. USco provides the employee with a leased vehicle for both business and personal use and pays the lease amounts. It is assumed that there is no employer-employee relationship between USco and the employee and that USco does not pay for any other costs associated with the vehicle (i.e., paragraph 6(1)(a) of the Income Tax Act (the "Act") does not apply). It is also assumed that USco and Canco are related for purposes of the Act (see paragraphs 251(2)(b) and (c) of the Act).

Issues

1. Is there a taxable benefit under paragraph 6(1)(e) of the Act that must be reported in Canada? If so, who reports the benefit and on what form (i.e., a T4 or T4A)?

2. What exchange rate is used for converting the US dollar benefit into Canadian funds?

Our Comments

There is a taxable benefit to the employee in the situation outlined above just as there would be in a similar domestic arrangement. Paragraph 6(1)(e) of the Act regarding automobile stand-by charges applies "where the taxpayer's employer or a person related to the employer [makes] an automobile available to the taxpayer" (emphasis added). As USco is a person related to the taxpayer's employer in this case (Canco), paragraph 6(1)(e) will apply and the stand-by charge for the vehicle (as computed under subsection 6(2) of the Act) will be a taxable benefit to the employee.

The general requirement for a person to file an information return in respect of non-cash employment benefits is contained in subsection 200(2) of the Regulations. Regulation 200(2)(g) states that every person who confers a benefit the value of which is required by paragraph 6(1)(e) to be included in computing a taxpayer's income from an office or employment (i.e., a stand-by charge) must make an information return in prescribed form except where Regulations 200(3) or (4) apply. In the situation described above, Regulation 200(3) applies as the benefit included in the taxpayer's income is in respect of an automobile made available to the taxpayer by a person related to the taxpayer's employer. Where Regulation 200(3) applies it is the taxpayer's employer who must make the information return. Accordingly, Canco is required to provide a T4 in respect of the taxable benefit in the situation described above.

With respect to how to determine the appropriate exchange rate for reporting the taxable benefit on the T4, we note that there is no fixed rule except that the method used must be reasonable in the circumstances. In a situation such as the one referred to above, it would generally be reasonable to calculate variable E in the formula described in subsection 6(2) using the exchange rate on the date of each lease payment; it would also generally be reasonable to use an average exchange rate for the time period in question. However, we would not consider it reasonable for the taxpayer to use the exchange rate at the end of the year to calculate variable E for the year, especially where the exchange rate has varied significantly over the year (consider, for example, that the Canadian dollar rose significantly in value against the US dollar over the course of the past year). In any event, the CCRA should be prepared to accept exchange rates determined by the taxpayer where the taxpayer has presented a reasonable explanation for the rate (or rates) selected. As we commented in a recent document (#2003-0017307):

"In reference to appropriate methods of foreign currency translation, we ... refer you to the Federal Court Trial Division decision The Bank of Nova Scotia v. The Queen, 80 DTC 6009 (affirmed by the Federal Court of Appeal 81 DTC 5155) wherein the taxpayer became liable for UK income taxes at the end of its fiscal period but was not required to pay until 14 months later. The court accepted the taxpayer's usage of the weighted average exchange rate which prevailed during the fiscal period in question rather than the exchange rate that prevailed where the UK taxes were actually paid on the basis that it accorded with GAAP, [and] the taxpayer's normal accounting procedures which did not offend the general scheme or purpose of the Act, and ... it was more logical and simpler to apply. Lastly, we refer you to the Tax Court of Canada judgment in Jalal Rezvankhah v. The Queen 2002 DTC 3811 wherein Bowman ACJ stated:

The use of the average annual exchange rate is simply an administrative convenience, not an inflexible rule."

We trust that our comments will be of assistance to you. If you have questions regarding the content of this letter please contact the officer noted above at (613) 952-1361.

Yours truly,

Jim Wilson, Manager
International Section I
for Director
International and Trusts Division
Income Tax Rulings Directorate