12 January 1990 Ministerial Correspondence 58554 F - Application of Legislation Relating to Automobiles

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.

January 11, 1990

Dear Sir:

Re:  Application of Legislation Relating to Automobiles

We are responding to your letter of August 18, 1989 in which you raise a series of questions relating to the acquisition of passenger vehicles and the extent to which the assets may be claimed as a deduction against related income earned.  We regret the delay encountered in providing the response.

The first set of questions are related to a situation in which an employee who, prior to 1988, has acquired (or was deemed to have acquired) an automobile for the purposes of earning employment income and was in receipt of a flat automobile allowance from his employer which was treated as non-taxable.  That same allowance was being received in 1988 but by virtue of the introduction of new subparagraph 6(1)(b)(x) of the Income Tax Act (the "Act"), effective for the 1988 and subsequent taxation years, it was required to be included in income.  Once the allowance was required to be included in income, and otherwise having met the requirements of paragraph 8(1)(h) of the Act, the employee became entitled to claim automobile expenses, including an amount in respect of the capital cost of the automobile, as permitted by subparagraph 8(1)(3)(ii) of the Act.  You have requested clarification as to how the automobile will be treated for capital cost allowance ("CCA") purposes. Specifically you have asked:

a)     how the cost and undepreciated capital cost ("UCC") of the automobile is determined for the 1988 taxation year,

b)     whether the capital cost would be restricted to the $20,000 maximum for passenger vehicles,

c)     whether the 50 percent rule would apply in 1988, and

d)     whether the change-in-use rules would apply under the circumstances.

For employees who are entitled to claim expenses under paragraph 8(1)(f) or (h) of the Act, a claim in respect of CCA is authorized by subparagraph 8(1)(j)(ii) of the Act.  In calculating the amount of CCA that may be claimed the rules contained in Regulation 1100 and subsection 13(7) of the Act are applicable.  Regulation 1100 permits an allowance in respect of assets in class 10 or 10.1 to be claimed at a rate of 30% of the UCC of the property.  The UCC is defined, for this purpose, in paragraph 13(21) of the Act, as being the amount by which the capital cost of property in the class exceeds the total depreciation allowed to (deducted by) the taxpayer before that time.  In the situation described in your submission, no amount has been deducted by the employee on his returns of income for years in which that automobile had been used in the course of employment.  The UCC, therefore, would continue to be the original capital cost regardless of the fair market value of the automobile at the beginning of the year.

The limitation applied to the capital cost of an automobile under paragraph 13(7)(g) of the Act is restricted passenger vehicles as that term is defined in subsection 248(1); i.e., an automobile acquired after June 17, 1987.  If the automobile was acquired prior to June 18, 1987 then it would have been included in class 10 in the year in which the vehicle was first used in the course of employment even though no CCA claim was made in that year. The 50% rule would not have application in 1988 since the rule described in Regulation 1100(2) applies only to assets acquired within the taxation year.  An automobile acquired in a previous taxation year would not be subject to this restriction.  The change-in-use rules would not apply if there has not been a change in the use regularly made of the property, i.e. use of the property in the income earning process.  The only change in use rules that would apply are those set out in paragraph 13(7)(d) and (e) of the Act with respect to the change in the proportion of employment versus other usage of the vehicle.

The second situation presented in your letter involves the lease of a passenger vehicle valued at $33,000 by an employer who makes the vehicle available to the employee.  The total monthly lease payments for which the employer is liable in respect of the vehicle is $900.00; however, the employer is reimbursed by the employee for that portion which exceeds the $600.00 ceiling described in section 67.3 of the Act.  You have noted that in applying the formula set out in that section for determining the maximum monthly payment deductible, the $300.00 reimbursement by the employee further reduces the amount of lease payments deductible by the employer.  Since the employee, as assumed in your letter, is not entitled to claim expenses under section 8 of the Act (including the $300.00 payment in respect of a portion of the lease) it is your conclusion that the bottom line result of the application of section 67.3 of the Act is not equitable and you ask whether such a result was intended.

We would first like to confirm that in the calculation of the limit on deductible leasing costs under section 67.3 of the Act the maximum amount otherwise determined is reduced by any amount of reimbursement received in respect of that lease.  As to whether such a result was intended, it is our view that the result is consistent with the notion that the maximum amounts that would be deductible with respect to any given vehicle are to be limited to the prescribed amounts.  In the situation described above, the employer has entered into a lease agreement to acquire a passenger vehicle valued at $33,000.00 resulting in required monthly payments of $900.00.  Normally, the deductible portion of the payment in this situation would be limited under the provisions of section 67.3 of the Act to $600.00 per month.  If any other person(s) agrees to contribute to the cost of the lease either by way of reimbursement or by being a joint lessee of the vehicle the maximum amount deductible by the employer is reduced accordingly.  Where a vehicle is leased jointly (with each co-lessee proportionately liable to the lessor) section 67.4 specifically provides that the maximum deductible amounts referred to in section 67.3 are shared proportionately in accordance wish each person's interest in the vehicle.  Where the lessee enters into an agreement to be reimbursed for a portion of the lease cost each such reimbursement, is applied to the deductible portion of the employer's lease cost.  It should be noted that regardless of whether or not the employee is entitled to claim automobile expenses under section 8 of the Act, the total reimbursement may be used to offset the standby charge benefit enjoyed by the employee in respect of the automobile made available to him by his employer.  The effect, therefore, of the application of both section 67.3 and paragraph 6(1)(e) of the Act is the sharing of the maximum deductible amount.

The third situation deals with the joint purchase of a passenger vehicle by two or more persons and the question asked, based on the example provided, concerns the cost at which the vehicle is to be recorded for CCA purposes on the schedules of the employer and the employee.  The example describes a company policy which limits the capital cost of vehicles provided to employees at $18,000.00 and that if an employee wishes to be provided with a more expensive vehicle (for example, one costing $22,000.00) the excess over the $18,000.00 ceiling ($4,000.00) must be paid by the employee.

The treatment accorded this kind of arrangement depends on whether the vehicle is, in fact, jointly owned or whether the reimbursement by the employee is a transaction that is separate from the actual purchase of the vehicle.  A property is considered to be jointly owned in circumstances where two or more persons jointly hold title to the property and are jointly liable to the vendor for the agreed-to purchase price.  Where such is the case, section 67.4 of the Act provides for the apportionment of the limits referred to in paragraph 13(7)(g) of the Act." Consequently, each of the co-owners of the vehicle would have a reduced capital cost in respect of that vehicle.

If, on the other hand, there is just the single purchaser of record, the  employer, then the limitations with respect to capital cost are applied  entirely to him.  Where the employer proceeds to make that vehicle  available to the employee, a standby charge benefit is considered to be  received by the employee computed on the full unrestricted cost of the automobile being provided.  The standby charge is reduced by any amount paid by the employee to the employer in the year for the use of the automobile.  Accordingly, in the above example, the standby charge would be reduced by such part of the excess $4000.00 the employee is required to cover that is actually paid by him in the year.

We hope the foregoing will help to clarify the Department's position on these matters.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch