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: Taxable status of motor vehicle allowances received in various scenarios.
Position: Question of fact.
Reasons: The taxable status of the allowance depends on several factors, including whether it was paid for employment related travel, its reasonableness, and whether it is paid in combination with a flat-rate allowance.
Randy Hewlett
XXXXXXXXXX 613-941-7239
2005-012256
April 5, 2005
Dear XXXXXXXXXX:
Re: Employee Benefits - Motor Vehicle Allowances
We are writing in response to your letter of March 24, 2005, wherein you asked for our opinion on the taxable status of motor vehicle allowances received by employees of the XXXXXXXXXX (the "City") in the following scenarios:
I. Per-kilometre allowance for employment related travel
Employees who are non-unionized and employees who are unionized but only required to occasionally use their vehicles on City business, are paid an allowance of XXXXXXXXXX cents per kilometre for all kilometres driven while on City business. The City does not include any of these payments on employees' T4s or issue them a T2200.
II. Combination of a flat-rate and per-kilometre allowance for employment related travel
Pursuant to the collective agreement between the City and the XXXXXXXXXX (the "Union"), if the City determines that an employee who is a member of the Union must have a motor vehicle available for business purposes, the employee will be paid an allowance of XXXXXXXXXX cents per kilometre for all kilometres driven while on City business. However, this payment cannot be less than $XXXXXXXXXX in any given month that the employee is required by the City to have the motor vehicle available. The City includes both allowances on employees' T4s and provides them with a T2200 so that they may claim motor vehicle expenses.
III. Combination of a flat-rate and per-kilometre allowance for employment related travel plus a per-kilometre allowance for travel between home and worksites
Some employees described in II above may also be paid the per-kilometre rate for travelling between their home and the first and last worksite of the day. These employees generally report to a facility owned by the City but are often required to travel directly between their homes and various worksites. The City includes all allowances on employees' T4s. The City provides employees with a T2200 so that they may claim motor vehicle expenses, but does not consider the allowance for travel between home and the first and last worksites to be employment related travel.
IV. Per-kilometre allowance for employment related travel plus a per-kilometre allowance for travel between home and worksites
Some unionized employees described in I above may also be paid the per-kilometre rate for travelling between their home and the first and last worksite of the day. These employees generally report to a facility owned by the City but are often required to travel directly between their homes and various worksites throughout the City. The City only includes on employees' T4s the allowance for travelling between their home and the first and last worksite of the day and does not provide employees with a T2200.
Discussed below are the provisions of the Income Tax Act (the "Act") that are relevant to the types of motor vehicle allowances described above, followed by our opinion on each of the scenarios.
Paragraph 6(1)(b) of the Act
A reasonable per-kilometre allowance received by an employee for the use of his or her personal motor vehicle in connection with the duties of employment is generally excluded from employment income by virtue of paragraph 6(1)(b) of the Act. Subparagraph 6(1)(b)(vii.1) of the Act, for example, excludes "reasonable allowances for the use of a motor vehicle received by an employee (other than an employee employed in connection with the selling of property or the negotiating of contracts for the employer) from the employer for travelling in the performance of the duties of the office or employment".
What constitutes "travelling in the performance of the duties of the office or employment" is discussed in Interpretation Bulletin IT-63R5, Benefits, Including Standby Charge for an Automobile, from the Personal Use of a Motor Vehicle Supplied by an Employer - after 1992. In general terms, travel between an employee's home and regular place of employment is considered personal. It will always be a question fact whether a particular work location is considered a regular place of employment. However, any location at or from which the employee regularly reports for work or performs the duties of employment is generally considered a regular place of employment. An employee could have more than one regular place of employment, which can change from time to time because of the nature of the employment situation. Where an employee (as required by the employer or with the employer's concurrence) proceeds directly from home to a point of call other than the employee's regular place of employment, or returns home from such a point, such travel is considered employment related.
Reasonable Allowance
The reasonableness of a motor vehicle allowance is always a question of fact. As a general rule, 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). The prescribed rate in section 7306 of the Regulations generally reflects the key cost components of owning and operating an automobile, such as depreciation, financing, insurance, maintenance and fuel costs. In 2005, for most areas of Canada the rate is 45 cents per kilometre for the first 5,000 kilometres driven and 39 cents for each additional kilometre.
Flat-Rate and Combined Allowances
For purposes of paragraph 6(1)(b) of the Act, a motor vehicle 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)]. When an employee receives a flat-rate allowance, the amount is deemed unreasonable by virtue of subparagraph 6(1)(b)(x) of the Act because the allowance is not based "solely on the number of kilometres" the motor vehicle is used for employment purposes. Where an employee receives a combination of a flat-rate and reasonable per-kilometre allowance, if the flat-rate amount compensates the employee for any of the same use on which the reasonable per-kilometre amount is based, the two amounts are considered to be one allowance and deemed unreasonable by virtue of subparagraph 6(1)(b)(x) of the Act. Allowances deemed unreasonable by virtue of subparagraph 6(1)(b)(x) of the Act must be included in the employee's income.
Motor Vehicle Expenses
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. Where an employee receives any motor vehicle allowance during a taxation year that was, because of paragraph 6(1)(b) of the Act, not included in computing the employee's income for the year, no expenses may be claimed under paragraph 8(1)(h.1). However, if the employee can show that the employment-related motor vehicle expenses are in excess of the motor vehicle allowance that was not included in income because of paragraph 6(1)(b) of the Act and voluntarily includes the allowance in income, the CRA will generally permit the deduction if the requirements in section 8 of the Act are otherwise met.
Taxable Status of Scenarios Described Above
I. Per-kilometre allowance for employment related travel
In our view, this allowance is excluded from employment income by virtue of subparagraph 6(1)(b)(vii.1) of the Act.
II. Combination of a flat-rate and per-kilometre allowance for employment related travel
In our view, for any particular month that an employee's allowance is based solely on the number of kilometres the motor vehicle is used for employment purposes, the monthly allowance is not required to be included in the employee's income. However, should the number of kilometres the vehicle is used for employment purposes in any particular month be so low that the employee is paid the minimum amount of $XXXXXXXXXX, the monthly allowance must be included in income.
Where all allowances are voluntarily included in the employee's income for the year, the employee may be entitled to a deduction for motor vehicle expenses. If the employee chooses not to include in income the per-kilometre allowance received in any particular month during the year, the employee is not entitled to claim any motor vehicle expenses for the entire year, even if the employee has received a $XXXXXXXXXX minimum allowance in other months of the year that is included in income.
III. Combination of a flat-rate and per-kilometre allowance for employment related travel plus a per-kilometre allowance for travel between home and worksites
Our view is the same as in II above. The status of the allowance for travel between home and worksites in any particular month will depend on whether each worksite is considered the employee's regular place of employment. This can only be determined on a case-by-case basis and will depend on factors such as the frequency to which a particular location is visited and the degree of travel required by the employee. If a worksite is not considered the employee's regular place of employment, travel between the employee's home and the worksite is considered employment related.
IV. Per-kilometre allowance for employment related travel plus a per-kilometre allowance for travel between home and worksites
The allowance received in respect of employment related travel is excluded from income by virtue of subparagraph 6(1)(b)(vii.1) of the Act. However, as noted above the status of the allowance for travel between home and worksites will depend on whether a particular worksite is considered the employee's regular places of employment.
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 Planning Branch
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