3 December 1993 Income Tax Severed Letter 9324577 - Automobile Allowance—Less than Reasonable Amount?

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.

                                          December 3, 1993

       Edmonton District Office           Personal and General
       Client Assistance                    Section
                                          D. Zion
                                          (613) 957-2140
       Attention: Sheila Hanson

                                          932457

Subparagraph 6(1)(b)(vii.1) and paragraphs 8(1)(h.1) and 8(1)(j) of the Income Tax Act (the Act)

This is in reply to your facsimile of August 26, 1993 concerning the interaction of the above noted provisions of the Act. We apologize for the delay in responding.

You have asked whether, when determining if an automobile allowance is less than a reasonable amount for the purposes of subparagraph 6(1)(b)(vii.1) of the Act, you should compare the amount of the allowance to the motor vehicle travelling expenses (which we understand from your comments you consider to mean operating costs) exclusively, or to the total of the taxpayer's motor vehicle travelling expenses and motor vehicle costs (interest and/or capital cost) under paragraphs 8(1)(h.1) and 8(1)(j) of the Act respectively.

It is the Department's view that the question of the reasonableness of an allowance must be dealt with on a case by case basis, taking into consideration each employee's circumstances. Accordingly, we will accept the view that an employee's allowance is not "reasonable" where the employee's total expenses for business use in the year exceed the total allowances received in the year. Under subparagraph 6(1)(b)(vii.1), such cases will result in the employee being entitled to include the allowance in income and claim the related business expenses to the extent that they are reasonable.

Given that the taxpayer meets the conditions outlined in paragraph 8(1)(h.1) of the Act, that paragraph states that "amounts expended by the taxpayer in the year in respect of motor vehicle expenses incurred for travelling in the course of employment,..." may be deducted. The Department's position regarding what would be considered motor vehicle expenses can be found in paragraph 3 of IT-522 which states that "the deductible amount is normally that proportion of the aggregate of the

a) total operating expenses...,

b) capital cost allowance and

c) interest

that the distance travelled by the vehicle to earn the employment income is of the total distance travelled by the vehicle for the year...".

In paragraph 4 of the same bulletin there is again reference to the three components of motor vehicle expense. IT-521 for self-employed taxpayers also makes reference to motor vehicle expense and indicates that the same three components are considered in determining the total motor vehicle expenses.

The fact that a taxpayer must first be entitled to a claim under paragraph 8(1)(h.1) of the Act before a deduction under paragraph 8(1)(j) may be claimed should not be taken to mean that these two components (interest and capital cost as allowed by regulation) should be ignored in the computation of motor vehicle expenses against which to compare the automobile allowance for reasonableness.

We trust that our comments have been of assistance.

P.D. Fuoco Section Chief Personal and General Section Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch