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.
Principal Issues:
whether a standby charge can be computed when there is no apparent consideration, no cost to the employer in acquiring the automobiles.
Position TAKEN:
Whether there is a cost to the employer, cash or non-cash, is a question of fact.
Reasons FOR POSITION TAKEN:
In an arm's length transaction there is likely to be consideration given in exchange for the use of the automobiles and that consideration becomes the cost of the automobile for the purposes of the calculation under subsection 6(2) of the Act.
942100
J. A. Szeszycki
XXXXXXXXXX (613) 957-8953
Attention: XXXXXXXXXX
November 9, 1994
Dear Sirs:
Re: Standby Charge
This is in reply to your letter of August 17, 1994 concerning the application of paragraph 6(1)(e) and subsection 6(2) of the Income Tax Act (the Act) to the facts of a hypothetical situation presented in your letter. We regret our delay in providing you with a response.
Our understanding of the facts presented can be summarized as follows:
1.X is a registered charity as that term is defined in subsection 248(1) of the Act.
2.Company A is in the automotive industry and, as a sponsor of X, would provide two automobiles to be used by the employees of X. Company A would retain title to the vehicles and would be responsible for insuring them against loss or damage.
3.Company A is providing the automobiles as a condition of its sponsorship relationship to promote the visibility of the automobile with the activities of the charity.
4.An emblem identifying the charity is affixed to each automobile.
5.During normal working hours the automobiles are parked at the office of the charity and are available to the staff for use on charity business.
6.Before and after normal working hours the automobiles are used by key employees of the charity in connection with charity functions in their capacity as executives of the charity.
7.Executives of X normally drive the automobiles to and from work at the request of Company A so that the automobiles are seen at public functions.
8.The executives of X reimburse the charity on a per kilometre basis for the operating costs of the automobiles that relate to driving to and from work.
9.The executives of X own their own automobiles for other personal usage such as vacations and weekends.
It is your view that, under the circumstances described above, there should not be a standby charge computed under paragraph 6(1)(e) and subsection 6(2) of the Act since there was no amount paid by Charity X to Company A for the use of the automobiles and no employer-employee relationship exists between the executives and Company A. It is your further view that due to the broad restrictions placed on the non-business usage of the automobiles the imposition of a standby charge would be inappropriate.
Paragraph 6(1)(e) of the Act provides that where an employer makes an automobile available to an employee, the employee must include in his income from employment for the year an amount that is considered a reasonable standby charge. In the situation described above, Charity X is making two automobiles available to its employees. Paragraph 6(1)(e) is therefore applicable to the affected employees.
The computation of the standby charge is set out in subsection 6(2) of the Act. A key factor in the calculation of the standby charge is the cost to the employer of either purchasing or leasing the automobiles that are being made available to the employees. Logically, if there is no cost to the employer then the result of the calculation is nil. The issue, therefore, is whether there is in fact a cost to the employer.
In the situation described, the automobiles are being provided as part of a sponsorship arrangement between Charity X and Company A, a party with whom X is presumably dealing at arm's length. Being a hypothetical situation, there is no agreement to examine with respect to the complete terms of the sponsorship arrangement; however, where two parties are dealing with each other at arm's length, we find it unlikely that goods or services are provided by one party to another party for no consideration at all. The consideration need not necessarily be in cash. It is not uncommon for the use of automobiles or other goods to be provided in exchange for non-cash consideration such as goods, services or certain rights and privileges. In short, what is commonly known as a barter transaction. For example, the consideration may take the form of promotional service in the course of performing the activities of the charity, perhaps it takes the form of advertising in the charity's literature.
In our view, each of these services, rights or privileges extended to Company A in exchange for use of the automobiles has a value. While the precise value of the consideration itself may be difficult to determine, collectively the value should equal, in an arm's length arrangement, the value of the goods being provided by the other party. The value of the goods provided by Company A, in the absence of any other details would be the fair value for the lease of those automobiles. That value would then be considered the cost to Charity X, the employer, in providing the automobiles to its employees.
As to the appropriateness of the standby charge under the circumstances, it is our view that where an automobile is made available by an employer to an employee for his/her use the employee is receiving a benefit by virtue of that employment. The Act provides a method of computing the value of that benefit for tax purposes. You will note that the calculation of the reasonable standby charge set out in subsection 6(2) of the Act provides for a reduced benefit in circumstances where the personal usage made of the automobile is minimal.
We hope our comment will clarify the Department's views in this matter.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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