2 July 1991 External T.I. 911510 F - Standby Charges - Leased 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.

Re: Standby Charges - Leased Automobiles

This is in reply to your memorandum of June 3, 1991 in which you requested our views on whether the provisions of paragraph 6(1)(e) of the Income Tax Act apply to the fact situation summarized below.

The facts as set out in the memorandum you received from the Saskatoon District Office include the following:

24(1)

Employer's Position

The employer's position is, essentially, that no taxable benefit accrues to the employee because the employee pays an amount under the lease agreement that reimburses the employer for his cost of acquiring the vehicle.  The employer reasons that there are three major components to a lease payment;

(1)     the interest cost associated with the vehicle acquisition from the supplier,

(2)       the depreciation of the vehicle and,

(3)       the profit element in the lease transaction.

The interest is the cost of financing the acquisition through the  24(1)  depreciation is the responsibility of the employee such that if the sale price to the eventual consumer falls below the wholesale cost to the dealer then the employee is required, under the agreement, to cover the difference, and the profit is the element that the employer is willing to waive under the circumstances.  Consequently, it is the employer's view that if the interest element is the employer's only cash cost then a reimbursement of that amount by the employee should result in no real benefit being received by the employee from the transaction.

District Office Position

The District Office is of the view that a taxable benefit has indeed been received by the employee in the form of a standby charge and the lease agreement is irrelevant except that the amounts paid under the agreement would reduce the amount of the benefit that is required to be included in income.

Our Comments 

It is our general view that where an employer makes an automobile available to an employee the provisions of paragraph 6(1)(e) and subsection 6(2) will supply regardless of the type of arrangements used by the employer to effect reimbursement of costs.

We are in agreement with the position taken by the District Office. The staff members are clearly in receipt of a benefit by virtue of their status as employees.  Benefits of any kind whatever are normally treated under paragraph 6(1)(a) of the Act; however, subparagraph (iii) excludes a benefit in relation to the use of the automobile (other than in respect of operating costs).  The benefit in respect of the use of an employer provided automobile is determined in accordance with the provisions of paragraph 6(1)(e) of the Act.  Where an employer makes an automobile available to the employee the amount by which a reasonable standby charge exceeds amounts paid to the employer in the year, for the use of the automobile, is required to be included in income.  The "reasonable standby charge" calculation is set out in subsection 6(2) of the Act.  We agree that the lease agreement, while it may provide for the reimbursement of actual employer costs, does not reflect a reimbursement of the total economic benefit enjoyed by the employee by virtue of his office or employment.

21(1)(b)

          You also referred to paragraph 27 of IT-470R which discusses employee discounts on merchandise.  You will note, however, that such a treatment relies on the merchandise being sold to the employee (with the resultant transfer of title) in which case the standby charge would not be applicable.

B.W. DathDirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch