15 July 2004 External T.I. 2004-0077791E5 - Employee Motor Vehicle Expense Deduction

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 employee can deduct motor vehicle expenses where an allowance for such expenses is also received.

Position: Question of Fact.

Reasons: Motor vehicle expenses incurred by an employee for travelling in the course of employment may be deducted in computing employment income under paragraph 8(1)(h.1) of the Act, unless the employee receives an allowance for such expenses and the amount is excluded from income under paragraph 6(1)(b). If the employee can show that the employment-related motor vehicle expenses are in excess of the allowance and voluntarily includes the amount of the allowance in income, the CRA will permit the deduction if the requirements in section 8 of the Act are otherwise met, including the employer's certification by signing the T2200.

XXXXXXXXXX
2004-007779

Randy Hewlett, B.Comm.

613-957-8972
July 15, 2004

Dear XXXXXXXXXX:

Re: Employee Motor Vehicle Expense Deduction

We are writing in response to your letter of May 11, 2004, wherein you asked for our opinion on the deductibility of motor vehicle expenses by an employee who receives a motor vehicle allowance.

You indicated that your employer pays you an allowance for the use of your personal motor vehicle for employment purposes. The allowance is based on the number of kilometres the vehicle is used for employment purposes. Your employer considers the amount of the allowance to be reasonable and therefore, does not include it in your total employment income on your T4. The allowance does not cover your cost of operating the vehicle for employment purposes. Therefore, you are of the view that you are entitled to include the amount in income and deduct motor vehicle expenses. However, your employer will not sign the form T2200.

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.

Where an employee receives a reasonable allowance for the use of his or her personal motor vehicle in connection with the duties of employment, the amount of the allowance is generally excluded from employment income by virtue of subparagraph 6(1)(b)(v), (vi) or (vii.1) of the Income Tax Act (the "Act"). The determination of whether an allowance is reasonable can only be made after a careful examination of all of the relevant facts.

As a general rule, an allowance will be considered reasonable if it 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. The limits in section 7306 of the Income Tax Regulations are also generally accepted as being reasonable for this purpose. For 2004, the limit in most areas of Canada is 42¢ per kilometre for the first 5,000 kilometres and 36¢ thereafter.

Motor vehicle expenses incurred by an employee for travelling in the course of employment may be deducted in computing employment income under paragraph 8(1)(h.1) of the Act, unless the employee receives an allowance for such expenses and the amount is excluded from income under paragraph 6(1)(b). On the other hand, if the employee can show that the employment-related motor vehicle expenses are in excess of the allowance and voluntarily includes the amount of the allowance in income, the Canada Revenue Agency (the "CRA") will permit the deduction if the requirements in section 8 of the Act are otherwise met.

Pursuant to subsection 8(10) of the Act, an employee is not entitled to a deduction for motor vehicle expenses in a taxation year unless the employee files the form T2200 with his or her return of income for the year. The T2200 must be signed by the employer certifying that the employee meets all of the necessary requirements in section 8 of the Act in the year. The CRA would expect that an employer would complete the form where the employee meets all of the requirements in section 8 of the Act.

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