8 July 2004 External T.I. 2004-0075691E5 - Taxable Motor Vehicle Allowance

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: Whether an allowance of 28 cents per kilometre for the business use of an employee's motor vehicle is unreasonable and therefore taxable, thus entitling the employee to deduct allowable motor vehicle expenses.

Position: Question of fact.

Reasons: The reasonableness of a particular allowance is a determination that can only be made after a careful examination of all of the relevant facts. A reasonable motor vehicle allowance for 2004 in most areas of Canada is 42¢ per kilometre for the first 5,000 kilometres and 36¢ thereafter, pursuant to section 7306 of the Income Tax Regulations. Pursuant to paragraph 8(1)(h.1), motor vehicle expenses cannot be deducted in computing employment income when an allowance for such expenses is excluded from income under one of the exceptions in paragraph 6(1)(b). However, if the employee can show that the business-related motor vehicle expenses are in excess of the allowance, and voluntarily includes the per-kilometre allowance in income, the CRA will permit the deduction (assuming all the other requirements of section 8 are met, including the employer's certification that the employee is required to use the motor vehicle in connection with his or her duties of employment).

XXXXXXXXXX
2004-007569
Kathryn McCarthy, CA
July 8, 2004

Dear XXXXXXXXXX,

Re: Taxable Motor Vehicle Allowance

We are writing in response to your letter of May 11, 2004, concerning the above-noted issue.

Your letter described an employee that is paid an allowance of 28 cents per kilometre for the business use of the employee's motor vehicle. You inquired whether this is an unreasonable and therefore taxable allowance, thus entitling the employee to deduct allowable motor vehicle expenses.

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 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. We are, however, prepared to provide the following general comments.

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 Income Tax Act (the Act). The reasonableness of a particular allowance is a determination that can only be made after a careful examination of all of the relevant facts. 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).

In addition, the limits in section 7306 of the Income Tax 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 2004, the limit in most areas of Canada is 42¢ per kilometre for the first 5,000 kilometres and 36¢ thereafter. For further information on motor vehicle allowances see the T4130, Employer's Guide to Taxable Benefits.

It should be noted, however, that 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; 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).

Pursuant to paragraph 8(1)(h.1) of the Act, motor vehicle expenses cannot be deducted in computing employment income when an allowance for such expenses is excluded from income under one of the exceptions in paragraph 6(1)(b) that are noted above. However, if the employee can show that the business-related motor vehicle expenses are in excess of the allowance, and voluntarily includes the per-kilometre allowance in income, the Canada Revenue Agency will permit the deduction (assuming all the other requirements of section 8 are met, including the employer's certification that the employee is required to use the motor vehicle in connection with his or her duties of employment).

The publications described herein are available on our website at www.cra-arc.gc.ca. We trust our comments will be of assistance to you.

Yours truly,

Randy Hewlett, B. Comm.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch