18 March 1992 Income Tax Severed Letter 9123565 - Automobile Benefits

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: AUTOMOBILE BENEFITS Section(s): 6(1)(a), 6(1)(e),
6(1)(e.1), 18(1)(r), 248(1)]

XXX 912356 M. Eisner 957-2138

Attention: XXX

March 18, 1992

Dear Sirs:

Re: Automobile Benefits

This is in reply to your letter of August 22, 1991 in which you asked us to consider a number of issues relating to taxable benefits in respect of vehicles provided to some of its employees by a local municipal government.

In your letter, some of the issues are of a general nature while others relate to a specific fact situation involving a particular municipality. Since the tax consequences of a specific fact situation can only be determined by reviewing all the relevant facts, our comments set out below on the issues raised in respect of such a situation must be construed as being general in nature rather than relating to a specific taxpayer.

Our comments on the issues you have raised are set out below in the order they were set out in your letter.

• (a) Definition of Automobile

(A) You have referred to subparagraph (b)(i) of the definition of “automobile” in subsection 248(1) of the Income Tax Act (the Act) which refers to a motor vehicle that is of a type commonly called a station wagon or van or similar vehicle if it is equipped in a reasonably permanent way to carry more than the driver and two passengers but not more than the driver and eight passengers. In relation to this situation, you have asked whether such a vehicle would not be regarded as an automobile if it was equipped in a reasonably permanent way (i.e. the rear seats have been removed) to carry a maximum of three persons.

You have made reference to the definition of “automobile” which was amended when Bill C-18 was enacted into law. Since the new definition is applicable to taxation years and fiscal periods commencing after June 17, 1987 that end after 1987, the following comments in this letter are based on the current definition of “automobile” in subsection 248(1) of the Act. With respect to the above issue, we have made comments on a station wagon and other comments on a van or similar vehicle as a consequence of the wording in the definition of automobile.

The opening wording of this definition, which refers to a “motor vehicle designed or adapted primarily to carry individuals on highways or streets and that has a seating capacity for not more than the driver and eight passengers”, would include a station wagon. In relation to this wording, subparagraph (e)(i) of this definition excludes a “van or pick-up truck or similar vehicle” provided it has a seating capacity for a maximum of three persons and the use requirement therein is satisfied. Since a van or pick-up truck would normally have significantly more cargo space than a station wagon, it is our view that a station wagon would not be regarded as a “similar vehicle”.

In the situation where the rear seats of a van or a similar vehicle have been removed, it is our general view that it would not be described in subparagraph (e)(i) of the definition of automobile unless the removal could be said to have permanently altered the vehicle such that the seats could not easily be refitted into the vehicle and the “use” requirement therein was satisfied. However, in making this type of determination in respect of an actual fact situation, it is necessary to review the relevant facts. If you have a particular situation with which you are concerned, you may wish to contact your local district taxation office.

(B) Each of the exemptions in subparagraphs (e)(i) and (ii) of the definition of “automobile”, refers to certain vehicles which are used “in the course of gaining or producing income”. It is our view that this requirement has been satisfied where a vehicle was used in providing government services.

(C) With respect to the definition of “automobile” in subsection 248(1) of the Act which excludes certain vehicles (e.g., ambulances, and a vehicle used primarily as a taxi), you have suggested that administrative relief should be granted for certain types of vehicles that are described therein. As an example of this type of situation, you have referred to deputy and assistant deputy fire chiefs who use “automobiles” provided by their employers to drive to and from work. These officers are on call on a 24 hour - 7 day a week basis and are an integral part of a local government's emergency operation plan. The vehicles provided to the officers are red, well marked, and are equipped with emergency lights, siren, radio, personal protective gear etc. You have indicated that the public views these vehicles in a manner similar to a police vehicle and the officers are expected to complement this public perception by their behaviour in emergency situations. In addition, whenever these vehicles are used by the officers (including driving to and from work), they are constantly vigilant of any activity that could affect the quality of fire protection within their community.

An extensive study was carried out by this Department on the use of employer automobiles by law enforcement and public safety personnel. The study concluded that it was not possible to provide an exemption for such vehicles from the definition of “automobile” without prejudice to other individuals performing similar duties under similar conditions. It is, therefore, not possible to regard the vehicles in question as not being automobiles. It is also our view that travel to and from work by the officers is personal because the primary purpose of the trips is personal in nature.

Consistent with our comments in the preceding paragraph, it is not possible, in our view, to include a nominal benefit in an officer's income under paragraph 8(1)(a) of the Act in these circumstances.

• (b) Calculation of Taxable Benefit for Employer-Provided Automobile

(A) In this type of situation, an employer has a fleet of vehicles (some of which satisfy the definition of “automobile” in subsection 248(1) of the Act). For the purposes of determining the cost of insurance in the calculation of operating benefits in respect of personal use under paragraph 8(1)(a) of the Act, you have asked whether an average insurance cost may be used.

The Department considers that the underlying concept regarding the computation of taxable automobile benefits in respect of operating costs is that any such costs paid for by the owner (employer) that would be out-of-pocket costs of the user (employee) of the car (had that person owned the car personally) are to be included in the total operating costs. Accordingly, it is not permissible to use an average insurance cost rather than the actual cost in determining the total operating costs of an automobile for the purposes of computing taxable benefits under paragraph 8(1)(a) of the Act.

(B) As an extension of the type of situation in (b)(A) above, the average cost of insurance for each vehicle is low as a consequence of a high deductible amount in respect of each accident. Where automobiles are used personally, the employer would determine the accident costs that were incurred in respect of personal travel. Such costs would then be averaged in respect of those vehicles and allocated to the taxable benefits (operating costs) otherwise determined (accident costs incurred in the course of employment would not be included). However, the employer would cap the amount included as a taxable benefit in respect of these costs. In this regard, the cost of insuring each of the vehicles in question under a conventional insurance policy will be determined and included in the total operating costs. The total will then be prorated based on personal kilometres. If the amount of the benefit determined in this manner is less than the benefit determined by using total operating costs (other than accident costs) and adding an amount in respect of accident costs determined as previously mentioned, this lesser amount will be considered the amount of the benefit for the purposes of paragraph 8(1)(a) of the Act.

For the reasons set out in respect of the immediately preceding issue, it is our view that costs incurred in restoring damaged automobiles cannot be averaged in the above manner. Rather, all accident repair costs (including those that are attributable to an accident that occurred in the course of providing services for the employer) in respect of a particular automobile must be included in the total operating costs of that automobile for the purposes of calculating benefits under paragraph 6(1)(a) of the Act. In addition, it is our view that an imputed cost for self insurance would not be acceptable as a replacement for the actual repair costs incurred. We also note that these comments are consistent with the comments set out in paragraph 6 of Interpretation Bulletin IT-63R3. In the event that accident repair costs to a vehicle were substantial such that it may cause financial hardship to an employee, the employee may elect to have the operating cost benefit determined pursuant to subsection 8(2.2) of the Act provided the automobile was used primarily in the performance of the duties of the employee's office or employment.

However, we also wish to note that in the situation where an employer capitalizes the replacement cost of a vehicle written off as a result of an accident, it is our view that such a cost would not be included in the operating costs in computing taxable benefits.

(C) An employer wishes to use an average cost for the purposes of the standby charge calculation to prevent employees performing the same job function from having different benefits simply by virtue of the fact that some are provided with newer automobiles than others. The “average cost” referred to would be the average cost (including provincial sales tax and the goods and services tax) of the automobiles used by employees of the employer who have similar job functions. In connection with this method of determining the standby charge, you have referred to paragraph 21 of IT-83R3 which indicates an averaging method (as described therein) is appropriate where an employee and employer agree, and an employee is not assigned an automobile on a long-term basis. In view of those comments, it has been suggested that a precedent has been established for using an average cost.

The standby charge determined under paragraph 6(1)(e) is modified by subsection 8(7) of the Act. Under subsection 8(7), the goods and services tax (GST) is to be excluded in calculating a benefit under paragraph 6(l)(e) of the Act. But under paragraph 8(1)(e.1) of the Act, an additional benefit must be calculated in respect of the GST. However, for the purposes of paragraph 8(1)(e.1) of the Act, the amount of a benefit determined under paragraph 6(1)(e) is to be altered to remove a provincial tax prescribed under section 154 of the Excise Tax Act (a provincial retail sales tax is a prescribed provincial tax) to the extent that it can reasonably be regarded as part of the benefit. Accordingly, the following comments are based on the premise that the “average cost” you have referred to would exclude the GST and is relevant only for the purposes of paragraph 8(1)(e) of the Act. A separate benefit would then be calculated pursuant to paragraph 8(1)(e.1) of the Act which would be based on the standby charge adjusted to remove the provincial sales tax.

It appears to us that the averaging method to which you have referred in paragraph 21 of IT-63R3 is not applicable to the above type of situation. This is due to the fact that those comments deal with pooling or similar arrangements whereby an employee has access to different automobiles available for personal use whereas, in the above situation, it appears that an employee would essentially have the exclusive use of one automobile throughout the time it is owned by the employer. On the basis that this is the case, it is our view that the standby charge for the purposes of paragraph 8(1)(e) of the Act is to be computed in respect of the automobile(s) actually used by a particular employee.

(D) As a general rule, travel between the regular workplace and the employee's residence is personal. In relation to this general position, you are concerned with a type of situation where an employer requires employees to leave vehicles provided to them at a location designated by the employer before they return to their residences following the end of their work day.

On the basis that the employer maintains the vehicles at the designated location to prevent personal use, it appears to us that travel between the designated location and an employee's normal work location or travel between the designated work location and another site where employment duties are to be performed is not of a personal nature. Similarly, it appears that personal travel would not be involved when the employer's vehicle is returned at the end of his/her work day.

• (c) Calculation of Taxable Benefit Relating to Employer-Provided Motor Vehicle (Other than an Automobile)

(A) Paragraph 13 of IT-83R3 indicates that an employee's taxable benefit in respect of the employee's use of a vehicle (other than an automobile) provided by the employer is to be determined under paragraph 8(1)(a) of the Act. This paragraph states in part that “where a motor vehicle other an automobile is essential to the employer's business operation, and its only personal use is to provide transportation between an employee's residence and the employer's business premises, it may be appropriate to compute the benefit to the employee on a cents-per kilometre basis for equivalent automobile transportation”.

Where it is appropriate to compute the benefit pursuant to those comments quoted from paragraph 13 of IT-63R3, the use of the rate prescribed in Regulation 7306 for the purposes of paragraph 18)(1)(r) of the Act will normally be accepted.

(B) As an extension of the situation in (c)(A) above, it is possible that the rate used by an employer to pay allowances to employees for the use of their personal cars in carrying out their employment duties may be higher than the proposed rate prescribed for the purposes of paragraph 18(1)(r) of the Act. In our view, this fact does not, in and by itself, obligate the employer to use this higher rate for purposes of the cents-per-kilometre calculation referred in (A) above.

• (d) Determination of Personal Travel

You have raised a number of issues concerning whether certain travel is of a personal nature and have referred to paragraph 5 of IT-83R3 which includes general comments in that regard. This paragraph states that “personal use includes travel between the employer's place of work and home, even though the employee may have to return to work after regular duty hours. An exception to this rule occurs, however, where (as required by the employer or with the employer's permission) the employee proceeds directly from home to a point of call other than the employer's place of business to which the employee regularly reports, or returns home from such a point. These particular trips are not considered to be of a personal nature.” Our comments on the issues you raised in relation to this position are set out below.

(A) The fact that an employee travels to his residence with a vehicle provided by his/her employer from the regular place of work, but remains on call as part of the employee's employment contract, does not, in our view, change the basic purpose of the trip. Therefore, this travel is considered to be personal. However, where the employee uses the vehicle to make emergency calls at various locations (other than at his regular place of work), this travel is not considered by this Department to be of a personal nature.

(B) The fact that an employee maintains regular radio (or telephone) contact with the employer while travelling home from the normal work place does not, in our view, change the primary purpose of the trip. Accordingly, this travel is considered to be of a personal nature.

(C) In this type of situation, an employee requires the use of a vehicle provided by his/her employer which is specifically designed to enable the employee to carry out his/her employment duties. In order for the employee to commence his/her employment duties, the employee supplies his/her own means of travel to the location where the vehicle is kept by the employer when the vehicle is not being used in providing services of the employer. The employee then uses the vehicle to carry out his employment duties for a period of time. When these duties have been completed, the employee returns to his residence with the vehicle because he/she is on call during the night. In the morning following the end of his/her call duty, the employee returns the vehicle to the location and is responsible for providing his/her own means of transportation back to his residence. An example of an employee in the above type of circumstances is an animal control officer. In the above situation, it appears to us that the travel by the employee in the employer's vehicle back to his residence with respect to a period of time that the employee is on call and the travel in that vehicle for the purposes of returning it to the employer prevents the employee from using it for personal travel. In these circumstances, it is our general view that this travel is not of a personal nature. However, we also caution that this position is confined to the unique set of circumstances set out above.

(D) The last issue that you have raised involves a type of situation where employees are provided with vehicles (other than automobiles) which are only appropriate for the carrying out of certain services provided by the employer. Since the calculation of a benefit using the rate prescribed for the purposes of paragraph 18(1)(r) of the Act for personal travel between the normal place of work and the employee's residence, may not be reflective of the fair market value of the benefit to the employee, a lesser benefit will be included in income.

With respect to the above situation, we agree that the taxable benefit relating to the use of the vehicle which is to be included in an employee's income is the fair market value to the employee of the benefit. It also seems possible for such a benefit to be less than the amount that would be determined by using the rate prescribed for the purposes of paragraph 18(1)(r) of the Act. However, the determination of the quantum of such a benefit involves a question of fact. If you have a particular situation with which you are concerned, you should contact the Source Deductions Section of your local District Taxation Office.

We hope that the foregoing comments are of assistance to you.

Yours truly,

P. D. Fuoco
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch