26 May 2015 External T.I. 2015-0565961E5 - Reasonable Motor Vehicle 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: Whether a per-kilometre allowance that exceeds the amounts prescribed by Regulation is considered reasonable? Whether a minimum daily motor vehicle allowance is deemed not to be reasonable?

Position: See response.

Reasons: See response.

XXXXXXXXXX
2015-056596
T. Baltkois

May 26, 2015

Dear XXXXXXXXXX:

Re: Reasonable motor vehicle allowances

We are writing in response to your letter of December 22, 2014, concerning the taxability and reasonableness of certain motor vehicle allowances. In the situation you describe, an employee who is required to use his or her motor vehicle in the performance of employment duties is entitled to receive a motor vehicle allowance of $XXXXXXXXXX per-kilometre or $XXXXXXXXXX per-trip, whichever is greater.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (Act) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Subject to certain conditions, subparagraphs 6(1)(b)(v), (vi), and (vii.1) of the Act provide that reasonable motor vehicle allowances received by employees in respect of travelling in the performance of their duties may be excluded from income. Generally, a motor vehicle allowance is considered to be reasonable if all of the following conditions apply:

• The allowance is based only on the number of business kilometres driven in a year;
• The per-kilometre rate is reasonable; and
• An employee is not reimbursed for expenses related to the same use of the vehicle.

While the Canada Revenue Agency (CRA) generally considers the per-kilometre rates prescribed in section 7306 of the Income Tax Regulations to be reasonable for purposes of subparagraphs 6(1)(b)(v), (vi), and (vii.1) of the Act, a per-kilometre rate that differs from the prescribed rates may also be considered reasonable. Generally, a per-kilometre rate 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 reasonable. For example, factors such as the type of vehicle, driving conditions, or higher fuel costs at a particular location, may warrant an increase to the per-kilometre rate provided to employees who are affected by such factors.

In the situation described, an employee who is required to use his or her motor vehicle in the performance of employment duties may receive a per-kilometre allowance or a per-trip amount, whichever is greater. Provided that the per-kilometre allowance received by an employee for such travel is reasonable, the amount would generally be excluded from income by subparagraph 6(1)(b)(v), (vi), or (vii.1) of the Act. The fact that the employee could have received a per-trip amount in respect of his or her employment-related travel would not affect this position.

However, where an employee receives a flat rate motor vehicle allowance that is not based solely on the number of kilometers driven (e.g., a per-trip amount), the allowance would not be considered reasonable for purposes of subparagraphs 6(1)(b)(v), (vi), and (vii.1) of the Act, and must be included in income.

In situations where an employee receives a motor vehicle allowance (per-kilometre or flat rate) that is determined not to be reasonable and is included in income, he or she may be entitled to deduct motor vehicle expenses under paragraph 8(1)(f), (h), or (h.1) of the Act.

Generally, the deduction of motor vehicle expenses under paragraph 8(1)(f), (h), or (h.1) of the Act is limited to situations where (among other things) an employee was ordinarily required to carry on the duties of employment away from the employer's place of business (e.g., the employee's regular place of employment) or in different places. Where an employee satisfies the conditions of paragraph 8(1)(f), (h), or (h.1) of the Act, subsection 8(10) of the Act requires an employee to obtain a completed Form T2200, Declaration of Conditions of Employment, from his or her employer.

We trust these comments will be of assistance to you.

Yours truly,

Nerill Thomas-Wilkinson, CPA, CA
Manager
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch