12 February 2004 External T.I. 2003-0051801E5 - Employer-reimbursed vehicle lease costs

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: What amount, if any, should be treated as a taxable benefit

Position: General comments only.

Reasons: Question of fact.

XXXXXXXXXX 2003-005180
J. Gibbons, CGA
February 12, 2004

Dear XXXXXXXXXX:

This is in response to your letter dated December 2, 2003, in which you requested clarification concerning the income tax treatment of a reimbursement of an employee's vehicle lease costs by the employer.

In your letter, you present a hypothetical situation wherein an employee is reimbursed monthly for the full cost of an automobile lease, including the applicable goods and services tax and provincial sales tax. You state that the employee uses the vehicle 95% of the time for employment purposes, based on a detailed mileage log maintained by the employee. You have asked the following questions with respect to this scenario:

1. Should the taxable benefit related to the reimbursement of the employee's personal expenses, i.e., 5% of the employee's monthly vehicle lease costs, be reported on the employee's T4 at the end of the year?

2. Does the reimbursement of the portion of the vehicle lease related to employment (i.e., 95% of the total) constitute a non-taxable receipt?

3. Are payroll deductions required on any taxable benefit arising from the reimbursements?

4. Is the employer subject to the restriction in section 67.3 of the Income Tax Act (the "Act") with respect to deducting the amount paid to the employee in respect of the automobile lease?

Our comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advanced income tax ruling submitted in the manner set out in Information Circular 70-6R5. However, we have provided some general comments below, which we hope will be of some assistance to you.

Benefits to Employee

The income tax treatment of payments made by an employer to an employee to cover work related expenses depends on whether the payments constitute an allowance or a reimbursement of expenses, and whether they are reasonable in the circumstances. This can only be determined after reviewing all of the facts and circumstances, including the employment contracts, employer's written policies, and the method and nature of the payments. Since you indicated in your letter that the employee received a reimbursement of expenses, we will consider the issue on this basis.

As explained in paragraph 51 of Interpretation Bulletin IT-522R, Vehicle, Travel and Sales Expenses of Employees, the reimbursement by an employer of an employee's reasonable employment-related travel expenses would not normally be considered a taxable employment benefit, but the reimbursement of an employee's personal expenses would be included in employment income. In this regard, it is our view that expenses incurred for travel between an employee's home and his or her regular work location would be considered personal expenses. The allocation of the reimbursement between reasonable expenses incurred for employment-related travel and expenses incurred for personal travel can only be determined after reviewing all of the facts and documentation including the nature of the employment, the type of vehicle leased, and the relationship between the employer and the employee.

The value of any taxable employment benefits (prorated to each pay period) should normally be added to the employee's salary to determine the amount subject to payroll deductions. Further, the value of benefits received by the employee in the year would have to be reported on the employee's T4 slip. See the Employer's Guide-Taxable Benefits 2003-2004 for more information.

Deductibility to Employer

In our view, the amount deducted by the employer in respect of the vehicle lease reimbursements paid to the employee would likely be subject to the restriction in section 67.3 of the Act. This provision limits the amount that may be deducted by a taxpayer in respect of lease costs that are paid or payable, directly or indirectly, by the taxpayer for leasing a "passenger vehicle" (a defined term in subsection 248(1) of the Act). It is our view that the employer would likely be considered to have indirectly paid the vehicle lease charges in the above scenario. See the 2003 Business and Professional Income guide for more information on the meaning of the term "passenger vehicle" and the calculation of the deductible lease costs.

The publications referred to above can be obtained from our website which is located at www.ccra-adrc.gc.ca.

We trust that these comments will be of assistance.

Yours truly,

Wayne Antle, CGA.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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