24 February 2009 External T.I. 2008-0276661E5 - Government Rebates and Standby Charge

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: Tax treatment of government rebates and whether government rebates received for hybrid vehicles can reduce the standby charge and the operating cost benefits to employees where the employer leases the vehicles.

Position: Government rebates are included in income in accordance with paragraph 12(1)(x). The rebates do not reduce the standby charge and the operating expense benefit to employees.

Reasons: The formulas for the calculation of the standby charge and the operating expense benefit are based on the payments to the lessor.

XXXXXXXXXX 							2008-027666
A. Townsend

Dear XXXXXXXXXX :

Re: Government Rebates on Leased Vehicles - Standby Charges and Operating Cost Benefit

This is in response to your letter regarding government rebates received in connection with the leasing of hybrid automobiles. You have asked how such rebates would be reported for tax purposes. You have also asked whether such rebates, when received by an employer, would affect the standby charge or operating expense benefit reported for employees who use the leased automobiles in the course of employment.

The situation outlined in your letter appears to relate to a factual one. 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 income tax 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 offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

The government rebates referred to in your letter are received from the governments of Canada and Manitoba on the purchase or lease of fuel efficient vehicles. The Manitoba Hybrid Electric Vehicle Rebate program provides a $2,000 rebate to Manitoba residents who purchase or lease hybrid vehicles in Manitoba. The federal ecoAUTO Rebate Program provides a rebate of up to $2,000 on the purchase or long term lease of energy efficient vehicles.

Generally, a taxpayer should apply generally accepted accounting principles (GAAP) or well-accepted business principles consistent with the provisions of the Act in determining profit under subsection 9(1) unless a provision of the Act permits a departure from GAAP or well-accepted business principles. However, if the application of GAAP does not require the rebates received on the lease of fuel efficient vehicles to be included in income or reduce an expense, the rebates received by a taxpayer in the course of earning income from a business would be taxable income under subparagraph 12(1)(x)(ii) unless the taxpayer chooses to reduce its outlay or expense under paragraph 12(2.2)(b).

The value of the benefit derived by an employee from the personal use and availability of an automobile supplied by his or her employer is required to be included in calculating the employee's income. The benefit includes a standby charge and an amount for the operating costs related to the employee's personal use of the automobile

Subsection 6(2) sets out a formula for determining the amount of a reasonable standby charge for an automobile for the aggregate number of days that the employer makes it available to an employee during the period in the year that the employer owned or leased the automobile. In general, the standby charge is a maximum of 2% per month of the cost of the automobile, or 2/3 of the lease costs if leased. The formula restricts the lease costs to amounts paid to the lessor and includes the monthly lease expense, kilometre charges and terminal charges.

The government hybrid vehicle rebate programs are payments made to the employer for leasing fuel-efficient vehicles. Although the rebates reduce the cost of leasing the automobile to the employer, the rebates do not reduce the amount payable to the lessor. Therefore, based on the wording in subsection 6(2), the standby charge calculation is not affected by the rebates received.

Accordingly, the rebate received by the employer will not affect the operating expense benefit to the employee. Paragraph 6(1)(k) provides a formula for determining the amount of the automobile operating expense benefit to an employee. This amount is calculated as either 1/2 of the standby charge or a prescribed amount multiplied by the total number of personal kilometers driven in the year.

We trust these comments are helpful.

Lita Krantz
Assistant Director
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch