3 March 1992 Administrative Letter 9201626 F - Automobile Allowances Prescribed Amounts

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.

Automobile Allowances

We are writing in reply to your memorandum of January 13, 1992, wherein you requested our interpretation of the relevant provisions in the Act concerning the above noted subject, as they relate to the following two scenarios:

1.     An employer purchases a luxury vehicle which is made available for use by an employee. The employee uses the vehicle for business purposes and pays all of the vehicle's operating costs. The employer pays the employee a per-kilometre allowance equal to the maximum amounts prescribed by Regulations 7305 and 7306.

     With respect to the application of paragraph 18(1)(r), you have noted that; there is no requirement that all costs (i.e. both capital costs and operating costs) of the vehicle be borne by the employee and, the employer provided motor vehicle does not appear to be a reimbursement for purposes of subparagraph 6(1)(b)(xi).  In this situation you have requested our opinion as to whether or not the full amount of the per-kilometre allowance would be deductible to the employer.

Our Comments

In situations where an employer provides a per-kilometre allowance in excess of the amounts prescribed by Regulation, paragraph 18(1)(r) may limit the employer's deduction to the prescribed amount depending on the circumstances. If the allowance is to be included in the recipient's income, a reasonable amount paid or payable by the employer will be deductible to the employer, regardless of whether it is in excess of the prescribed amount.  In other words, paragraph 18(1)(r) has no application where the amount is equal to or less than the prescribed amount or the amount is required to be included in the income of the recipient.

In the situation set out above, it is our opinion that paragraph 18(1)(r) would not apply because the employer has not paid an amount in excess of the prescribed amount.  The fact that the employee did not incur both the capital and operating costs of the vehicle does not, in our view, impact on the application of paragraph 18(1)(r).  However, an argument could be made that section 67 could be applied to reduce the amount of the deduction if it is considered that the per-kilometre allowance did not reasonably reflect the employee's costs of operating the employer-owned automobile for business purposes and was, therefore, unreasonable in the circumstances.

From the point of view of the employee, a reasonable per-kilometre allowance is one that is intended to cover an employee's out of pocket costs related to the business use of the vehicle.  It would involve a finding of fact as to whether or not such an allowance is reasonable for purposes of subparagraph 6(1)(b)(vii.1). In the above situation, the employee appears to be in receipt of an allowance that would be equal to the prescribed amounts.  If the amounts are being paid at the prescribed rate without regard to the employee's out of pocket costs of operating the vehicle, it is our opinion that an argument can be made to include the per-kilometre allowance in the income of the employee because it would not be considered a "reasonable allowance(s) for the use of a motor vehicle received by an employee ...from the employer for travelling in the performance of the duties of the office or employment," as required by subparagraph 6(1)(b)(vii.1).

2.     An "independent contractor" is in receipt of an automobile allowance in addition to the contractor's contract revenue. Since, in your view; the relative provisions in section 6 of the Act do not apply to an independent contractor, it would involve a finding of fact as to whether the recipient of the allowance is required to include the allowance in contract income, and the payer is not in a position to know whether or not the independent contractor is required to include the allowance in income, the effect of this is to deny the deduction to all payers in virtually all cases where excess allowances are paid. You have requested our opinion as to whether there is any specific requirement for the independent contractor to include all automobile allowances in income.

Our Comments

Whether or not a particular individual is an independent contractor rather than an employee, depends on whether or not the individual's contract with the payer is a contract of service or a contract for services. In situations where an individual is in receipt of an automobile allowance, we believe there is a prima facie case to be made that the individual's contract with the payer is a contract of service and the relationship between the two parties is that of employer/employee. The CPP/UIC Coverage Section of Source Deductions Division would be in the best position to evaluate the status of the payer/payee relationship.

Where an individual is established as being an independent contractor, it is our opinion that the automobile allowance should be considered as part and parcel of the individual's gross contract revenue that would be included in income under section 9 of the Act.  It follows, therefore, that these costs could be claimed by the payer as ordinary business expenses under section 9 or paragraph 18(1)(a) as the case may be. 

If, however, the relationship is confirmed as being employer/employee, it is our opinion that the relevant provisions in paragraph 6(1)(b) should be applied to the recipient and that paragraph 18(1)(r) may apply depending on the facts in a particular case.

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

c.c.      Source Deductions DivisionCPP/UI Coverage Section