23 February 2009 Internal T.I. 2008-0300001I7 - Motor Vehicle Allowance - "Out-of-Pocket" costs

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 the motor vehicle CCA or lease payment limits provided in section 67.3 and paragraph 13(7)(g) of the Act give any meaning to the term "reasonable" when assessing the taxability of motor vehicle allowances under paragraph 6(1)(b) of the Act.

Position:

No.

Reasons:

These provisions limit the deductibility of expenses relating to "luxury" motor vehicles and are not determinative of the reasonableness of motor vehicle allowances for purposes of paragraph 6(1)(b) of the Act.

February 23, 2009

Re: Motor Vehicle Allowances

We are writing in response to your email correspondence dated November 12, 2008 and your subsequent email dated December 3, 2008 wherein you requested our comments on the relevance of section 67.3 and paragraph 13(7)(g) of the Income Tax Act (the "Act") and section 7307 of the Income Tax Regulations (the "Regulations") in determining the reasonableness of a motor vehicle allowances under paragraph 6(1)(b) of the Act.

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 subparagraphs 6(1)(b)(v), (vi) or (vii.1) of 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 a 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, 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) of the Act.

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 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 kilometers 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 supplemental business insurance or toll or ferry charges and the amount of the allowance was determined without reference to those reimbursed expenses).

For purposes of determining the reasonableness of an allowance, we note that motor vehicle lease or depreciation expenses included in "out-of-pocket" costs are not subject to the limits provided in section 67.3 and paragraph 13(7)(g) of the Act. These provisions limit the deductibility of expenses relating to "luxury" motor vehicles and are not determinative of the reasonableness of motor vehicle allowances for purposes of paragraph 6(1)(b) of the Act. However, where an employee receives a non-taxable motor vehicle allowance under paragraph 6(1)(b) of the Act, the employer will be restricted in its deduction of the allowance to the amount prescribed in section 7306 of the Regulations, pursuant to paragraph 18(1)(r) of the Act.

Where an employee can show that his or her employment-related motor vehicle expenses are in excess of the allowance (i.e., the allowance is unreasonable relative to the employee's "out-of-pocket" costs), and voluntarily includes the allowance in income, it is the CRA's practice to permit a deduction for the amount of the "out-of-pocket" costs incurred. However, the deductibility of the motor vehicle lease charges or capital cost allowance for the employee would be subject to the limits provided in section 67.3 and paragraph 13(7)(g) of the Act, respectively. In this case, by virtue of the exception in paragraph 18(1)(r) of the Act, the employer may deduct the full amount of the allowance, notwithstanding it may exceed the limits prescribed in section 7306 of the Regulations.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

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