13 August 1987 Income Tax Severed Letter 5-3603 - [Automobile Allowances and Reimbursements]

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.

XXXX

N.R. Mitchell Tel. (613) 957-2134 August 13, 1987

Dear Sirs:

Re: Automobile Allowances and Reimbursements

This is in reply to your letter of July 10, 1987. You advise us that your company is currently considering providing your sales force and certain management staff with a fixed monthly car allowance in lieu of a company-leased automobile. You have given us the following details about the proposal:

1. The employee would purchase or lease his own automobile to be used for company business in addition to personal use;

2. The employee would receive a car allowance of $500 per month to cover the cost of the automobile (lease or loan payments), repairs and maintenance, interest and license;

3. In addition to the above monthly allowance, the company would pay for the premiums for automobile insurance, oil (including regular oil changes), car washes, windshield wiper fluid and gasoline based upon the presentation of invoices and receipts; and

4. The employee would not be responsible to report to the company the time and kilometers which he or she spends on company business using the automobile.

You have asked our opinion as to whether or not the employees would be in receipt of taxable benefits in the circumstances described above and, if so, the method of calculation of this benefit and the obligation of the employer to determine and assess such benefit for the purposes of preparing each employee's annual T-4 summary of employment income. You have also asked if the proposed monthly automobile allowance would be considered to be a reasonable amount for the purposes of the exception in subparagraph 6(1)(b)(v) of the Income Tax Act (the "Act"), assuming that the other requirements for that exception can be satisfied.

We must advise you at the outset that we are unable to provide you with firm responses to many of your inquiries because these involve issues of fact which could only be resolved by reference to all of the surrounding facts and circumstances of each case. Nonetheless, we are willing to provide you with the following general comments.

First, it should be noted that an "allowance" received by an employee from his or her employer is to be included in income and is subject to tax unless it falls within the exceptions listed in subparagraphs 6(1)(b)(i) to (ix) or subsection 81(3.1) or is otherwise excluded from income under subsection 6(6) of the Act. In the case at hand, you have stated that the employees would not have to account to their employer for their use of the monthly payments of $500; accordingly, these payments would indeed appear to be allowances and not non-taxable reimbursements or accountable advances in respect of specific expenses that the employees may incur in the course of their duties of employment.

Depending upon the facts of a particular situation, those car allowances which are paid to members of the company's sales force may nonetheless qualify for the exception in subparagraph 6(1)(b)(v) of the Act and be excluded from the employee's incomes. However, paragraph 6(1)(b)(v) of the Act only provides this exclusion for "reasonable" allowances for travelling expenses. The reasonableness of an allowance claimed to be non-taxable under subparagraph 6(1)(b)(v) of the Act is a question of fact and must be related to the amount of the actual expenses incurred by the employee for travelling in the course of carrying out the duties of his or her employment. The fact that an employee receives reimbursements for various travelling expenses over and above the amount of any allowances received would obviously be highly relevant in determining the reasonableness of the allowance. As outlined in paragraph 30 of the enclosed Interpretation bulletin IT-272R , if the Department considers that an allowance claimed to be non-taxable under subparagraph 6(1)(b)(v) of the Act is unreasonably high, the employee is required to show that the allowance is not in excess of a reasonable amount. Where the employee is so required but is unable to do this, the excess over the amount determined to be reasonable is included in his income.

Where any amount is received as an allowance for travelling expenses which is not included in income, the employee is precluded by subparagraphs 8(1)(f)(iv) and (h)(iii) from deducting any of those expenses which he has actually paid in the year. Furthermore, in the case at hand, the sales employees would not appear to be able to elect for the procedure sanctioned by paragraph 34 of the Bulletin whereby an employee may include an otherwise exempt allowance in his income and then claim expenses under paragraph 8(1)(f) or (h) of the Act. This option is only available where the allowance received by the employee is "unreasonably low". While we must reiterate that the question of reasonableness is a question of fact, it appears rather unlikely that an allowance of $500 per month (in addition to substantial reimbursements of other travelling expenses) could be considered unreasonably low; indeed, under the circumstances given, $500 per month would appear to be no lower than a reasonable amount and possibly in excess of a reasonable amount. Only if the entire allowance was in excess of a reasonable amount could the whole amount received as a monthly allowance be included in income and expenses claimed under section 8 of the Act. (In such a case, this treatment would, in fact, be mandatory.) This too appears unlikely, given that you have informed us that the employees are responsible for paying some expenses (car lease or loan payments, repairs and maintenance, interest and licence) without reimbursement by the employer.

The situation of the management staff who also receive the $500 monthly allowance appears to be more clear. On the assumption that the management staff are not "employed in connection with the selling of property or negotiating of contracts", they would not be able to exclude the travelling allowance from their income under paragraph 6(1)(b)(v) of the Act. Similarily, these allowances would qualify for the exception in subparagraph 6(1)(b)(vii) of the Act because a fixed monthly allowance is not computed by reference to time actually spent by the employee travelling away from his place of employment as is required by the terms of the subparagraph. Accordingly, provided they otherwise qualify, these management staff may be eligible to deduct their non-reimbursed travelling expenses under paragraph 8(1)(h) or (j) of the Act.

With respect to the proposal to pay or reimburse specific automobile expenses (including insurance, gasoline, oil, maintenance and repairs) we would advise that these payments could be treated as non-taxable only to the extent that they defray expenses incurred by the employee on the employer's behalf. Any other automobile expenses would be regarded as personal and living expenses the payment or reimbursement of which would give rise to a taxable benefit under paragraphs 6(1)(a) or (b) of the Act. As such, the latter amounts must be reported and tax withheld by the employer in the normal manner. You advise us in your letter that the employee would not be responsible to report to the company the time and kilometers which they spend on company business. We would therefore assume that the employer would have no means of determining what proportion of these payments and reimbursements were in respect of an employee's personal use as distinguished from use required in the course of his or her duties of employment. Under these circumstances, it is our view that the employer would be obliged to report all of these undifferentiated payments and reimbursements as remuneration to the employees. We would add that there would be no provision where by the employee could subsequently deduct or exclude from income those payments or reimbursements which did in fact relate to non-personal use. Paragraph 8(1)(h) of the Act stipulates that to deduct travelling expenses, the employee must, first, have been required by his contract of employment to pay the travelling expenses incurred by him in the performance of his duties and, second, he may only deduct those amounts so expended. An employee who was actually reimbursed for the travelling expenses in question would fail to qualify on both of these counts.

On the other hand, it would appear to be possible - provided an adequate system of reporting and controls was in place and appropriate records were maintained - to distinguish between reimbursements in respect of business and employment use. Where this is done, the employer would only be required to report (and the employee to include) as income to the employee those amounts which pertained to personal use. For payments of a mixed business and personal character, such as insurance premiums or maintenance and repair costs, a reasonable allocation based on the ratio of business to personal use may be used to determine the taxable portion.

Finally, with respect to the issue of the employer's obligations and liabilities for reporting income paid to employees and withholding tax deductions at source, we would offer the following brief comments. First, the value of any benefits, allowances or taxable reimbursements should, to the extent possible, be prorated to the employer's pay period. Second, an employer could indeed be liable for penalties, fines and other sanctions for failure to report taxable benefits or remuneration of the types discussed above, as well as for failure to withhold and remit the required deductions at source. Such liability could conceivably follow, for example, as a result of the exclusion from an employee's income under paragraph 6(1)(b)(v) of the Act of an allowance for travelling expenses in excess of a reasonable amount. For further information on this subject we would refer you to the enclosed booklet "Income Tax Deductions at Source".

Should you wish to obtain the Department's views about the appropriate tax treatment of a particular factual situation - including what might be considered a reasonable allowance for travelling expenses for the purposes of subparagraph 6(1)(b)(v) of the Act - we would suggest that you present all of the relevant details to the local District Taxation Office.

We hope this letter will be of some assistance.

Yours truly,

for Director Small Business and General Division Specialty Rulings Division Legislative and Intergovernmental Affairs Branch