30 November 1989 Ruling 58661 F - Automobile 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.

November 20, 1989

Dear Sirs:

Re:  Automobile Allowances

We are replying to your letters of August 29, 1989, and September 25, 1989, concerning the Fact Sheet on Employer-Provided Motor Vehicle Allowances issued by this Department in February 1989 (the "Fact Sheet").  Reference is also made to our telephone conversation of September 20, 1989 19(1)   Humenuk), in which you indicated that a reply to your first letter was not necessary.

We would like to preface our remarks with some general comments on automobile allowances.  Whether or not a particular allowance is considered reasonable can only be determined on an actual case basis, having reference to all the relevant factors.  Such a determination is having reference to all the relevant factors.  Such a determination is ordinarily made by the local district taxation office.  As stated in the Fact Sheet, the Department does not intend to provide a definition of "reasonable".  However, we would like to offer the following general comments on the questions you have raised:

On page 8 of the Fact Sheet the Department states that, where the facts of a case clearly indicate that the prescribed rate for the purpose of paragraph 18(1)(r) of the Income Tax Act (the "Act") is not reasonable, the actual expenses incurred by the employee will be the determining factor in determining whether or not an allowance is reasonable for the purpose of paragraphs 6(1)(b)(v), (vi) or (vii.1) of the Act.  You ask whether the term "actual expenses" as used in the Fact Sheet includes the purchase price of the vehicle, Federal and Provincial sales taxes on the purchase, interest cost incurred financing the acquisition, gas, oil, repairs, insurance and licensing costs.

In our view, the term "actual expenses" as used in the Fact sheet refers to current expenses rather than to capital expenditures such as the purchase price of an automobile and the related sale tax.  Current expenses include, however, non-cash expenses such as depreciation.  While it is not the Department's intention to provide either a numeric definition or an arithmetical calculation to be used in determining a reasonable allowance, a reasonable allowance my well be based in part on the fixed costs of automobile, such as interest, in addition to the variable operating costs provided that the final result is reasonable in the circumstances.

However, it should be noted that paragraph 6(1)(b)(x) of the Act deems an allowance to be in excess of a reasonable amount where the measurement of the use of the vehicle for the purpose of the allowance is not solely based on the number of kilometres for which the motor vehicle is used in connection with the office or employment.  Consequently, an allowance which includes a fixed amount for fixed costs such as interest will be deemed to be in excess of a reasonable amount notwithstanding the fact the allowance may be calculated in a reasonable manner.  Similarly, paragraph 6(1)(b)(xi) of the act deems an allowance to be in excess of a reasonable amount if the employee is also reimbursed in whole or in part for expenses in respect of the same use of the vehicle.

In summary, it is our view that the actual expenses referred to in the Fact Sheet include but are not limited to gas, oil, repairs, insurance, licence, interest and depreciation expenses.

You also ask whether the employer can take into consideration the type of vehicle which is required to be used by the employee in its determination of a reasonable allowance.  If the type of vehicle is relevant to the travel required of the employee, it would appear reasonable to consider the actual expenses associated with that type of vehicle.  However, in this regard, we would draw you attention to the court cases of W.J. Kent and Co. Ltd. v MNR 72 DTC 1018, and Zakoor v MNR 64 DTC 392 in which the court held that in the particular circumstances, the use of a luxury vehicle was not a requirement of the position.

We would also like to point out that the comments in the Fact Sheet are now reflected in Interpretation Bulletin IT-522 "Vehicle and Other Travelling Expenses - Employees", a copy of which is attached.  We caution that this opinion is not binding on the Department.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch

Enclosure