27 June 1995 External T.I. 9505055 - 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.

Principal Issues:

	Whether a standby charge can be computed when there is 	no apparent cost to the employer in acquiring the 	automobile. 

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 arrangement there is likely to be 	consideration given in exchange for the goods and 	services provided that is equal in value.  It is that 	value that becomes the cost to the employer for the 	purposes of the subsection 6(2) calculation. 

		950505
XXXXXXXXXX	J.A. Szeszycki

Attention: XXXXXXXXXX

June 27, 1995

Dear Sirs:

Re: Automobile Benefits

This is in reply to your letter of February 15, 1995 in which you requested our comments with regard to the application of the automobile benefit provisions found in section 6 of the Income Tax Act (the Act) to a specific set of circumstances as outlined below. We regret the delay encountered in providing you with a response.

The circumstances, as we understand them, are that a corporate employer has entered into a three-year agreement with an automobile dealer whereby the dealer agrees to make an automobile available to the corporation at no cost to the corporation. The use by the corporation of the automobile provides publicity for the automobile dealer. The employer makes the automobile available to one of its executives. The agreement further provides that at the end of the three- year period the car will be returned to the dealer and that, in the interim, the corporation will be responsible for its operating costs. Both parties are located in the province of Quebec.

In your analysis, you have made reference to the standby charge provisions of paragraph 6(1)(e) and subsection 6(2) of the Act. As you have noted, subsection 6(2) provides the formula for determining the quantum of the standby charge where the computation of that amount is required by virtue of paragraph 6(1)(e) of the Act. Two of the elements in the formula (elements C and E) call for the cost to the employer of either owning or leasing the automobile that is being provided to the employee. Consequently, it is your opinion that, when there is no cost to the employer of either leasing or owning the automobile, the formula produces a nil result.

It is your view that this is the appropriate result under the circumstances described above. In addition, the nil result under subparagraph 6(1)(e)(i), in your view, precludes the employee from an assessment under paragraph 6(1)(k) of the Act since one of the three essential criteria for inclusion in that paragraph, as outlined in subparagraphs (i), (ii) and (iii), would not be met. You have also noted that, in the recent amendments to the employment benefit rules, an assessment in respect of automobile benefits under paragraph 6(1)(a) of the Act is now entirely precluded due to the excluding provision of subparagraph 6(1)(a)(iii). You have asked for our comments on your analysis of the application of section 6 as a whole to the circumstances earlier described.

Our Comments

Paragraph 6(1)(e) of the Act provides that when an employer makes an automobile available to an employee, the employee must include in his income for the year an amount that is considered a reasonable standby charge. In the situation you described, the employer corporation has indeed provided an automobile to one of its executives. Paragraph 6(1)(e) of the Act is, therefore, applicable to that employee.

In the situation described, the automobile is being provided as part of an agreement between the employer corporation and the car dealer, a party with whom the corporation is presumably dealing at arm's length. 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 the other party for no consideration at all. The consideration need not necessarily be in cash. It is not uncommon for the use of automobiles 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.

In the arm's length transaction you describe, it is evident that the car dealer expects to receive some value in the form of publicity from the use of the vehicle by the executive. While the precise value of the consideration may be difficult to determine, in an arm's length arrangement it should equal the value provided by the other party. In this case, if the value of the publicity or advertising has not itself been quantified then in the absence of any other details that value would equal the fair value for the lease of the automobile and that value would be considered the cost to the employer in providing the automobile to the employee. Once the reasonable standby charge is established then the provisions of paragraph 6(1)(k) of the Act is a consideration.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch