7 February 2008 External T.I. 2007-0234891E5 - Employee Car Allowances; Gas Expenses

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: 1. Whether a flat-rate car allowance is a taxable benefit.

2. Whether an employer reimbursement paid to an employee as repayment of amounts spent on similar motor vehicle expenses is a taxable benefit.

Position: 1. Yes. 2. Question of fact.

Reasons: Reading of the legislation. 1. The allowances were not based solely on kilometres driven and reimbursements for motor vehicle costs were also paid to the same employees. Therefore, the allowance is deemed to be unreasonable by virtue of subparagraphs 6(1)(b)(x) and (xi) respectively, for purposes of subparagraph 6(1)(b)(v). 2. Only reimbursements representing payment of employees personal expenses will give rise to an income inclusion under either paragraph 6(1)(a) or 6(1)(b). Allocation of reimbursements between personal and business expenses is a question of fact to be determined on a case-by-case basis.

								2007-023489
XXXXXXXXXX 							Joy Bertram, B.Comm.,
	   							CGA, CPA (vt)
(613) 957-8954
February 7, 2008

Dear XXXXXXXXXX :

Re: Car Allowances and Gas Expenses

We are writing in response to your letter dated April 10, 2007, wherein you requested a written response as to whether the total amount of an employee's car allowances, gas card usage and gas expense reimbursements is a taxable benefit.

In your letter, you described a situation where commissioned employees use their own vehicles and receive a monthly car allowance based upon the particular employee's position and sales revenue. In addition, the employer provides gasoline credit cards and will also reimburse employees' gasoline expenses reported on expense reports.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

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 is a question of fact. The CRA's views regarding allowances for travel expenses are contained in ¶40-52 of Interpretation Bulletin IT-522R, "Vehicle, Travel and Sales Expenses of Employees". Generally, paragraph 6(1)(b) of the Income Tax Act (the "Act") requires that all amounts received by an employee in the year as an allowance for personal or living expenses or as an allowance for any other purpose be included in computing income for the year, subject to certain exceptions described in the legislation.

A reasonable motor vehicle allowance received by an employee in the year for travelling in the course of performing the duties of employment can be excluded from employment income if it complies with one of subparagraphs 6(1)(b)(v), (vi) or (vii.1) of the Act. Whether an allowance is considered reasonable is a question of fact.

We note that as explained in ¶42 of IT-522R, subparagraph 6(1)(b)(x) of the Act deems an allowance not to be reasonable if it is not based solely on the number of kilometres for which the automobile is used in connection with or in the course of performing the duties of employment. Further, an allowance is also deemed not to be reasonable by virtue of subparagraph 6(1)(b)(xi) of the Act if the employee receives both an allowance in respect of the use of the automobile and is reimbursed in whole or in part for expenses in respect of that 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). Since both of these situations exist in the scenario you have described, the allowance paid to the employees will be considered not to be reasonable.

Where an allowance is not a reasonable amount, the whole amount of the allowance is included under paragraph 6(1)(b) of the Act in computing the employee's income. If the employee qualifies, an appropriate amount may be deducted as an employment expense under paragraph 8(1)(f), (h) or (h.1) of the Act, as discussed in ¶31-38 of IT-522R.

As explained in ¶51 of IT-522R, a reimbursement for travel expenses is not income in the hands of the employee receiving it unless it represents payment of the employee's personal expenses. 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 and the relationship between the employer and the employee.

We trust the foregoing comments will be of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch