18 December 2009 External T.I. 2009-0320531E5 - Reasonable Allowances

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: Are weekly allowances paid by an employer "reasonable allowances" for the purposes of subparagraph 6(1)(b)(v) of the Act?

Position: Question of fact, but in this case it appears that the allowances are not reasonable.

Reasons: Allowances are not computed solely by reference to kilometres travelled for employment related purposes.

XXXXXXXXXX 								2009-032053
									Michael Cooke, C.A.
December 18, 2009

Dear XXXXXXXXXX :

Re: Automobile Allowances

We are writing in response to your letter dated May 1, 2009, wherein you requested our views on whether the automobile allowances paid by an employer to its sales employees would qualify as reasonable allowances for the purposes of paragraph 6(1)(b)(v) of the (the "Act").

Briefly, we understand that the particular employees are required to use their own automobiles for employment related purposes and the employer pays them a flat automobile allowance of $XXXXXXXXXX per week. You indicate that at the end of each year, each employee will be required to provide to the employer his or her actual employment-related mileage and personal mileage for the year in order to determine whether the particular allowance is reasonable.

Our Comments

The particular situation outlined in your letter appears, at least in part, to involve completed transactions. The Directorate does not provide written interpretations involving completed transactions since, as mentioned in paragraph 22 of Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002 ("IC-70-6R5"), such requests should be addressed to the appropriate Canada Revenue Agency ("CRA") Tax Services Office, a list of which are available on the "Contact Us" page of our website at http://www.cra-arc.gc.ca. In addition, IC-70-6R5 and the other publications referred to in this letter are also available on our website.

Notwithstanding the above, we are prepared to offer the following comments.

The reasonableness of any motor vehicle allowance is always a question of fact. However, as it may pertain to the situation described in your letter, subparagraph 6(1)(b)(v) of the Act excludes from income "reasonable allowances for travel expenses received by an employee from the employee's employer in respect of a period when the employee was employed in connection with the selling of property or negotiating of contracts for the employee's employer".

For the purposes of subparagraph 6(1)(b)(v) of the Act, subparagraph 6(1)(b)(x) of the Act deems a motor vehicle allowance not to be reasonable if it is not based solely on the number of kilometres for which the vehicle is used in connection with or in the course of performing the duties of employment. Further, such 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 vehicle 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).

It should be noted that the per-kilometre limits set out in section 7306 of the Regulations, which are prescribed for purposes of establishing employer deductibility of motor vehicle allowances under paragraph 18(1)(r) of the Act, do not specifically apply for purposes of paragraph 6(1)(b) of the Act. However, the CRA will generally accept that motor vehicle allowances based on such prescribed rates will be reasonable for these purposes.

In the situation described in your letter, there does not appear to be any requirement that an employee repay any excess amount of the allowance that he or she may have received in the year where the employment-related use of the motor vehicle multiplied by the predetermined per-kilometre rate is less than the amount of the allowance. This indicates that the allowance may also cover a portion of an employee's personal use of his or her motor vehicle. Moreover, it also appears that the allowances might be used to pay for other employment-related travel expenses, such as meals or lodging. In such circumstances, it cannot be said that such allowances are based solely on the number of kilometres the motor vehicle is used by an employee for employment-related purposes. Accordingly, it is our view that the full amount of such allowances would be required to be included in the respective incomes of the recipient employees pursuant to paragraph 6(1)(b) of the Act.

If a recipient employee qualifies, an appropriate amount may be deducted by the employee as an employment expense under paragraph 8(1)(f), (h) or (h.1) of the Act, as the case may be. Further information on the taxation of automobile allowances for employees and the deductions that may be available can be found IT-522R, Vehicle Travel and Sales Expenses of Employees. As you are aware, a bulk waiver is available where the employees' deductions under section 8 of the Act will substantially offset any income inclusion.

Alternatively, as described in the Employers' Guide: Taxable Benefits - T4130 under the heading "Averaging allowances", where an employer provides certain advances to its employees for motor vehicle expenses, such amounts do not have to be included a recipient employee's income where all the following conditions are met:

• there is a pre-established per-kilometre rate that is not more than a reasonable amount;
• the rate and the advances are reasonable under the circumstances;
• the employer documents this method in the employee's record; and
• no other provision of the Act requires the employer to include the advances in the employee's income.

Employees have to account for the employment-related kilometres they travelled and any advances they received either on the date their employment ends in the year, or by the calendar year end, whichever is earlier.

At that time, the employer must pay any amounts it owes the employee and where the employee has received an advance that is in excess of any actual employment-related expenses ("excess advance") the employee must actually repay the employer the amount of the excess advance. For greater certainty, the employer cannot simply report the amount of the excess advance on the employee's T4 slip.

Lastly, we would like to point out that travel between an employee's home and the employee's regular work location would usually be considered as being personal travel and not travel in the performance of the duties of employment. For additional information on what constitutes "travelling in the performance of the duties of the office or employment" you should refer to 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.

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