11 December 1987 Income Tax Severed Letter 7-2246 - [871211]

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.

DATE: DEC 11 1987

Source Deductions Division Research and Enquiries Section J.A. Szeszycki Tel: (613) 957-2130

R.A. Armitage

ATTENTION

RE: Standby Charge to XXXX

This memorandum is in response to yours of October 22, 1987 to which was attached a submission from the

XXXX

Taxpayer's Position

The taxpayers position, as expressed by XXXXXXXX is that the existing provisions o he Income "Tax Act (the "Act") are restrictive as to the circumstances under which an automobile standby charge can be asse ocd It.concludes, therefore, that since the circumstances in the case of thej 4(1) executives are clearly not referred to in those provisions, the computation of he benefit amount under subsection 6(2) results in no part of the benefit being included in income.

Paragraph 6(1)(e) of the Act provides for the assessment of a reasonable standby charge where an employer made an automobile available to the employee. The computation of the reasonable standby charge, for the purposes of paragraph 6(1)(e), is contained in subsection 6(2) which sets out the formula for the calculation of the charge under two specific sets of circumstances; where the employer owns the automobile in question and where the employer leases the automobile. The contention of the employer is that since it neither takes title to the vehicles nor incurs, any lease cost the use of the formula contained in subsection 6(2) would result in a nil standby charge and since, in their view, the assessment of a benefit under paragraph 6(1)(e) is dependent for its quantum on subsection 6(2), no benefit can be charged. They cite as support for their position a verbal opinion to that effect provided on a no-names basis by a member of this Division.

The District Office Position

The District Office is of the view-that paragraph 6(1)(e) can be applied independently of subsection 6(2), that subsection 6(2) provides the formula for the computation of the benefit under the two most usual circumstances described therein, without limiting the broader application of paragraph 6(1)(e). In support of their view, reference is' made to John H. Kearns v. MNR 1985, a Tax Court of Canada case which has significant similarities too the situation. at hand. Judge Cardin observed that the automobile was being made available to the appellant by the-company within the meaning and intent of paragraph 6(1)(e) and that a standby charge should be included in the taxpayer's income.

Our Comments

At the outset, it should be noted that'there appears to be no disagreement that a benefit has been conferred on the XXXX by virtue of their employment. The issue at hand is whet in the existing provisions of the Act, that benefit can be required to be included in income. More specifically, the question is whether the relationship between paragraph 6(1)(e) and subsection 6(2) is such that in order for the benefit contemplated under paragraph 6(1)(e) to be quantified the formula contained in subsection 6(2) must be used.

Subsection 6(2) is constructed in the form of a multiplication formula wherein the product is the reasonable standby charge. The multiplicand in the formula is itself the product of an equation which is founded on the cost to the employer of either owning or leasing the automobile. Consequently, when the automobile is neither owned nor leased by the employer the multiplicand, and obviously the product, will always be zero. It should be emphasized that the taxpayer argument is not that subsection 6(2) does not apply in the calculation of a standby charge in the present circumstances but that in its application the resulting amount is nil. It is clear, therefore, that if subsection 6(2) is required to be used under any circumstances then a benefit conferred on an employee by means other than the ones referred to in paragraphs (a) and (b) would be found to be non-taxable.

The District Office has made reference to a statement made by Judge Cardin in the Kearns case that a benefit within the meaning and intent of paragraph 6(1)(e) had been conferred on the employee and that the benefit should be included in income. Within the immediate context of that statement he does not indicate, however, whether the provisions of subsection 6(2) could be used to quantify that benefit. It is unfortunate, for our purposes, that in assessing the benefit he opted to use the broader benefit provision of paragraph 6(1)(a) which, for the years in question, did not contain the restrictive subparagraph (iii). As a result, while the very question that concerns us at this time was raised in the Kearns case it was left unresolved because an easier route was available for taxing the benefit. It should be noted, however, that in quantifying the 6(1)(a) benefit the general computation used was equivalent to the one provided in subsection 6(2).

The standby charge provisions were introduced as part of the Tax Reform package of 1972. A study of the relevant documents published at that time, including the earlier Report of the Royal Commission on Taxation, revealed that the primary concern with respect to the proper taxation of employment income and benefits, was the apparent trend in certain levels of the economy toward providing employees with non-cash benefits which were not being taxed. With an aim to restoring a sense of fairness to the system the Commission recommended, among other changes, the standby charge to deal with an employee's personal use of his employer's automobile. It is clear that the emphasis was on the proper taxation of the benefit and not the means by which the employer chose to provide the benefit. That emphasis was translated into the original wording of subsection 6(2) as it appeared in Bill C-259, i.e. "an amount that would be a reasonable standby charge for the automobile shall be deemed not to be less than XXXX where paragraph (a) and (b) covered the only two methods of conferring the benefit envisioned at that time. The subsequent amendment to paragraph 6(1)(e) and subsection 6(2) via Bill C-139, March 1983, which introduced the formula structure to subsection 6(2), clearly did not intend to alter the purpose of the provisions. We note that the Kearns case, which presented a different method of conferring the benefit, was not heard until two years after that amendment had been given Royal Assent.

While the present wording of subsection 6(2) does not lend strong support to the assessment of a quantifiable benefit, it was clearly not the intention of that provision to exclude from the assessment of a standby charge any employee who has an automobile made available for his personal use by his employer (by virtue of his employment) as contemplated by the wording of paragraph 6(1)(e). We would, therefore, not discourage an assessment of a paragraph 6(1)(e) benefit independent of the formula contained in subsection 6(2).

It is our further view that, in light of the clear intent of the legislation to tax the benefit and the clear intent of the employer to confer a benefit on the employee, the provisions of subsection 245(2) may also be considered in assessing and/or quantifying the benefit under Part I of the Act. The difficulty, however, in invoking the above provision is that the onus would be placed on the Department no show that, under the particular circumstances, the parties involved in the transaction did not deal with each other at arm's length (subsection 245(3)). XXXX

however, the issue and questions raised in the isitrict Office submission are nevertheless valid and, thus, warranted a fresh review.

ORIGINAL SIGNED BY ORIGINAL SIGNED PAR ROBERT H. JOYCE

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

c.c.: Calgary District Office