5 May 1992 Income Tax Severed Letter 9211550 - Speech on Auto Rules for Employee 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.

DRAFT RESPONSE TO QUESTIONS 1 - 5
       1992 TAX EXECUTIVE INSTITUTE CONFERENCE
                          Questions

1.       For employee supplied automobiles that are obtained
         by way of leases, some employers/employees have
         found that the best prices can be negotiated by the
         employer.  The employer leases the cars from the
         lessor and subleases them to the employees.  The
         employer agrees to pay the employee an allowance
         equal to the subleasing charges and the employee
         assigns this allowance back to the employer in
         payment of the sub-lease charges.

         Is this "allowance" an unreasonable allowance which
         must be included in the income of the employee?  Is
         the employee entitled to claim as a deduction both
         the leasing and operating expense of the
         automobile, subject to the limitations in paragraph
         8(1)(h.1) of the Act?

2.       Would the answer be the same as in 1 if, instead of
         subleasing the car to the employee, the employer

         i.
         assigned the car lease to the employee and 

         ii.
         remitted directly to the lessor the amount of the
         employer's car allowance?   

         N.B.  For the purpose of the above two questions,
         we note that De Boo version of the Income Tax Act
         shows subparagraph 8(1)(h.1)(ii) as: 
         "was required under the contract of employment to
         pay the motor vehicle expenses..."   
         whereas the CCH version shows it as:
         "was required under the contract of employment to
         pay motor vehicle expenses..."   
         We understand the latter version to be correct.

3.       If an employee is assigned more than one company
         leased vehicle in a year, is the employer required
         to prepare a separate calculation under subsection
         6(2) for each vehicle, or can the kilometres, costs
         and available days be totalled for the entire year
         for the purposes of calculating the formula based
         benefit?

4.       In a situation where an employee who is ordinarily
         required to carry on duties of employment away from
         his employer's place of business.,. who supplies
         his own car for travel, who is required to pay
         travelling expenses and who uses a credit card of
         his employer for all the travelling expenses
         incurred in carrying out his employment - i.e. a 
         credit card which is billed directly to and paid by
         the employer.
         i.
         Has the individual received a taxable benefit under
         paragraph 6(1)(b) or otherwise?
         ii.
         For the purposes of claiming a deduction pursuant
         to paragraph 8(1)(h.1), has the employee "expended"
         the amount that he charged to the credit card of
         this employer?

5.       Would the answer be the same if instead of the
         employee being required to pay the operating costs
         of the car, the employer agrees to pay all
         operating costs of the car subject to a charge to
         the employee for the portion of operating costs
         which are applicable to personal use?

DRAFT RESPONSE TO QUESTIONS 1 - 5Automobile Benefits and Expenses

I would like to address the questions that were asked concerning the calculation of employee benefits and employee deductions relating to automobiles and the assistance which may be provided by an employer.

Leasing Arrangements

The first two questions concern a situation where an employer enters into a leasing arrangement with a leasing company and then either subleases the vehicles to employees at cost or assigns the lease to the employee. Apparently, some employers have found that more favourable lease rates can be obtained by the employer rather than by the employee. I assume that this probably involves a situation where the employer leases several automobiles and therefore gets a fleet rate for all the automobiles leased. The fleet lease savings can then be passed on to the employee. In the first scenario, the employer pays the employee an amount equal to the lease payment (referred to as an allowance in the question). The employee assigns this amount to the employer in payment of the sublease charges. Would this amount be included in the employee's income as an allowance and if so, would the employee be entitled to a deduction for leasing and operating expenses under paragraph 8(1)(h.1) of the Act? In the alternative, we are asked if an amount would be included in an employee's income if the employer assigned the car lease to the employee and remitted the amount of the lease payment directly to the lessor.

In our view, the net effect in each of these situations is the same, i.e., the employer has effectively made an automobile available to the employee and, accordingly, the standby charge rules will apply. The fact that the employer fully pays for the lease costs supports this position. The offsetting payments in the first scenario puts the employee in the same position as he or she would have been had the employer not charged the employee for the lease and had not provided the employee with the funds to pay the lease charge, i.e., there seems to be little reason for the employer to sublease the automobile to the employee except to attempt to skirt the standby charge rules. The direct payments by the employer to the lessor in the second scenario suggest that the employer remains liable for the lease payments to the lessor and that it was always intended that the employer provide the employee with an automobile. Sublease

The amount paid to the employee was referred to as an "allowance" in the first scenario. Based on the Department's definition of "allowance" in paragraph 41 of Interpretation Bulletin IT-522 "Vehicle and Other Travelling Expenses- Employees", it is more appropriate to treat the amount as a reimbursement rather than as an allowance since the amount received by the employee is based on the actual lease charge and the employee is not free to use those funds to acquire the use of a vehicle in any manner he or she so chooses.

However, as a reimbursement, the amount would be included in the employee's income under paragraph 6(1)(a), which, as I will explain later would result in a full taxable benfit to the employee. Since it is our view that the effect is simply that the employer has made the automobile available to the employee, the offsetting payments between the employer and employee will be ignored for the purpose of applying the standby charge.

Even if the amount paid by the employer to the employee could be characterized as an "allowance", the employee would still be subject to a standby charge in that the employer has still "made an automobile available" to the employee. The amount paid by the employee as a lease charge would reduce the amount of the standby charge so calculated, presumably eliminating the standby charge. Since the "allowance" is not calculated on the basis of kilometres driven in the course of employment, paragraph 6(1)(b)(x) would deem the allowance to be in excess of a reasonable amount and it would thus be included in the employee's income.

Insofar as the deductibility of expenses by the employee is concerned, only operating expenses would be permitted to the extent they otherwise qualified.

The tax consequences of the first scenario can be summarized as follows: the automobile is considered to have been made available to the employee by the employer and, accordingly, the standby charge rules will apply to include 2/3 of the lease costs in the employee's income; the offsetting payments (i.e., the payment made by the employer to the emplyee and the employee's assignment of the payment back to the employer) will be ignored; and, the employee is entitled to claim operating expenses under paragraph 8(1)(h.1) to the extent that he or she is otherwise permitted.

If the offsetting payments were not ignored, the taxable benfit could conceivably be higher than the imposition of the standby charge as I indicated earlier. In such a case, the standby charge rules will still apply; the payment by the employee to the employer would be applied to reduce the standby charge; the payment made by the employer to the employee for payment of the lease charges would be included in the employee's income under paragraph 6(1)(a) (or 6(1)(b) if it can be established that, in fact, the amount paid is an allowance); and still only the operating expenses would be deductible to the extent they otherwise qualify. The result would be that the employee would be taxed for 100% of the lease costs as a benefit under paragraph 6(1)(a) or (b).

Assigned Lease

In the second scenario where the employer assigns the lease to the employee, there appears to be little change in substance to the first situation. In our view, the circumstances suggest that the employer again is factually making the automobile available to the employee. It appears to be an attempt to put the employee in the same position as if he or she had leased the automobile him or herself thus avoiding the standby charge rules. It is argued that the purpose is to get the better rate for the employee. However, in practical terms, we wonder if it is even possible to structure the transaction so that it would be considered a bona fide arrangement.

In all liklihood, if the lease entered into by the employer with the lessor is in respect of a fleet of automobiles, such an arrangement would involve a master lease under which the employer is obligated to make the payments and be subject to various terms and conditions under the lease. In order for the employer to "assign the lease" to the employee, a separate agreement would have to be entered into. Such an agreement would probably contain covenants that would obligate the employer under certain conditions. For example, in the event of termination of the employee's employment with the employer, the automobile would have to be returned to the employer's fleet and become subject once again to the master lease. In addition, in all probability the employer and not the employee is responsible for the lease payments under the assigned lease or, if the employee is responsible, the employer has guaranteed the payments and is ultimately responsible for fulfilling the terms of the lease. These and similar factors indicating the degree of the employer's involvement in the assigned lease would substantiate that the substance of the arrangement is factually a situation in which the employer is making an automobile available to the employee. However, if in fact it can be shown that a bona fide leasing arrangement does exist between the employer and the employee, the tax implications of the transaction will be the same as if the employee had leased the automobile directly from the third party lessor. A bona fide leasing arrangement might exist if the employer leases the automobile from an arm's length third party, the lease is capable of assignment, all the rights and obligations under the lease are capable of and are, in fact, assigned to the employee and are binding on all parties, the employer's obligations under the assigned lease are minimal, the employer is not obligated to make an automobile available to the employee under the terms of the employment contract, the employee has the choice of which vehicle he wishes to lease and it is otherwise reasonable to consider the arrangement bona fide.

If such an arrangement does exist, the income tax implications of the second scenario would be as follows:

(a)      the employee will be considered to be the lessee of
         the automobile,

(b)      the full amount of the payment made directly to the
         lessor by the employer will be included in the
         employee's income under 6(1)(a), and

(c)      the employee will be entitled to claim operating
         expenses  and the portion of the lease payment
         directly related to carrying out the employee's
         employment duties under paragraph 8(1)(h.1) to the
         extent that he or she is otherwise permitted.

Wording of 8(1)(h.1)(ii)

In connection with the above two situations, it was brought to our attention that the wording in 8(1)(h.1)(ii) in the DeBoo version of the Income Tax Act was slightly different than the CCH version. (The former says "was required under the contract of employment to pay the motor vehicle expenses..." whereas the latter states "was required under the contract of employment to pay motor vehicle expenses...") While we are not sure what the relevance is for the above two situations, it is the CCH version that is correct in its wording of this subparagraph.

Pooling Arrangements

The third question deals with the calculation of the operating costs benefit and the standby charge where an employee is provided with more than one automobile in a year. Our position on this question is outlined in paragraphs 20 to 22 of Interpretation Bulletin IT-63R3 "Benefits, Including Standby Charge for an Automobile from the Personal Use of a Motor Vehicle Supplied by an Employer". A separate calculation must be done for each vehicle for both the operating benefit and the standby charge. However, where the employee is not assigned a specific vehicle on a long-term exclusive basis and the employee and employer both agree, the standby charge may be calculated on the averaging method described in paragraph 21 of that bulletin. Paragraph 22 provides sample calculations for both employer-leased and employer-owned automobiles.

The last two questions deal with the operating expenses of an automobile.

Use of Employer's Credit Card

The fourth question deals with the payment of travelling expenses through the use of the employer's credit card. Is such a payment considered to be a taxable benefit to the employee? Or is it considered a reimbursement? In our view, the payment of expenses through the use of the employer's credit card is neither a reimbursement nor an allowance to the employee. It is simply a payment by the employer of an expense. A taxable benefit to the employee will arise only to the extent that the expenses so paid relate to personal items or use. Further, the employee is not entitled to deduct the expenses paid by the employer. Paragraph 53 of IT-522 discusses the impact of an employee's use of the employer's credit card on reasonable automobile allowances.

The fifth question relates to a situation where an employer assumes the responsibility for the operating costs of the vehicle and the employee pays the employer a proportionate amount for the personal use of the vehicle. Provided that the employee pays the employer the portion of the operating costs that pertain to the personal use of the vehicle, the employee would not be required to include a taxable benefit in income in respect of such operating costs. Since the employee is not responsible for the automobile expenses which pertain to the use of the vehicle in the performance of the duties of employment, the employee would not be entitled to deduct any amount in respect of the operation of the vehicle. Recent Amendments

At this point, I would like to review some of the recent amendments to the Income Tax Act and Regulations affecting automobile allowances and expenses.

Automobile Allowances

As you are aware, the exceptions in paragraph 6(1)(b) of the Act, as it read prior to the enactment of Bill C-18, distinguished between automobile allowances received by salespeople and those received by other employees. Allowances received by sales employees were excluded from income if they were reasonable whereas allowances received by other employees were only excluded from income if they were not in excess of a reasonable amount. This left it open for sales employees (but not other employees) to show that an allowance was unreasonably low and thus include the amount in income and claim the appropriate expenses under 8(1)(f) or (h) of the Act. This distinction has been removed so that any employee who wishes to claim expenses in excess of the employer provided allowance may do so provided that he or she can show that the allowance was not reasonable in the circumstances.

Another change worthy of note brought about by Bill C-18 to paragraph 6(1)(b) is the deeming provision in subparagraph (xi) which no longer renders an allowance unreasonable if there is reimbursement by the employer of amounts in respect of supplementary business insurance, parking, toll or ferry charges if the per kilometre allowance is determined without taking into account such reimbursements.

Regulation on ceiling for passenger vehicle costs

The Income Tax Regulations ("Regulations") were recently amended by Order in Council dated November 21, 1991 to include new section 7307 which sets out the revised limits for passenger vehicles.

More specifically, subsection 7307(1) provides that, for the purposes of subsection 13(2), paragraph 13(7)(g), subparagraph 13(7)(h)(iii), subsection 20(16.1) and the description of B in paragraph 67.3(d) of the Act, the $20,000 limit relating to the cost of such a vehicle acquired, or leased under a lease entered into, after August 1989 is raised to $24,000. Furthermore, the capital cost of passenger vehicles acquired or leased after 1990, will include, in addition to the $24,000 limit, the applicable GST and provincial sales tax ("PST") that would have been paid if the passenger vehicle had been acquired at a pre-tax cost of $24,000. Therefore, for purposes of determining the CCA deduction under either paragraph 8(1)(j) or 20(1)(a) of the Act, passenger vehicles purchased after 1990 and costing less than $24,000 (before GST and PST), will be placed in Class 10 in Schedule II of the Regulations. The amount added to this class includes the cost of the passenger vehicle (including GST and PST) less any applicable GST input tax credit or rebate. Passenger vehicles acquired after 1990 at a cost exceeding $24,000 (before GST and PST), will be placed in Class 10.1. The amount added to this class includes the aggregate of $24,000 plus the applicable GST and PST that would have been paid if the passenger vehicle had been purchased for $24,000. Of course, any GST input tax credit or rebate will reduce the capital cost of the passenger vehicle pursuant to subsection 13(7.1) of the Act.

Annemarie Humenuk May 4, 1992 921155-56-57-58-59

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