28 June 1995 External T.I. 9507005 - AUTOMOBILE OPERATING COST BENEFIT

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 payments by employees to third parties (rather 	than the employer) can reduce the operating expense 	benefit as now calculated under pararagraph 6(1)(k)

Position TAKEN:

no

Reasons FOR POSITION TAKEN:

	wording of 6(1)(k)(iii) is unambiguous and does not 	permit a reduction to the operating expense benefit for 	third party payments by employees

		950700
XXXXXXXXXX	Sandra Short

Attention: XXXXXXXXXX

June 28, 1995

Dear Sirs:

Re: Paragraph 6(1)(k) - Automobile operating expense benefit

This is in reply to your letter of March 6, 1995 which queries the department's position regarding the payment of operating expenses by an employee to third parties unrelated to the employer in those situations when other operating expenses are paid by the employer. The wording of subparagraph 6(1)(k)(iii) of the Act implies that payments to third parties rather than to the employer will not reduce the operating expense benefit to be included in the employee's income. You have noted that an employee will bear an income inclusion well in excess of any benefit enjoyed in a situation where only a small portion of total operating costs of the vehicle are paid by the employer - such as insurance premiums which are included in the lease cost- and all other operating costs are borne by the employee.

Coincident with the introduction of paragraph 6(1)(k) was the amendment to subparagraph 6(1)(a)(iii) of the Act to remove the calculation of the benefit under that provision. You have pointed out that, when the benefit was calculated under subparagraph 6(1)(a)(iii), amounts paid to third parties by an employee were treated in the same fashion as reimbursements to the employer; however, the wording of new subparagraph 6(1)(k)(iii) suggests that third party payments can no longer reduce the operating expense benefit. Kitchener Tax Services has indicated to you that, even with the introduction of paragraph 6(1)(k), payments to third parties will not be treated any differently than payments to the employer.

In our view, the wording of paragraph 6(1)(k) is unambiguous and does not permit a reduction to the operating expense benefit for third party payments by employees. As noted by you, the payment by an employer of any amount of a personal automobile operating cost of the employee brings the employee within the application of paragraph 6(1)(k) of the Act. It requires that, if the amount of personal automobile expenses is not reimbursed to the employer or a person related to the employer in full within 45 days of the end of the year, the operating cost benefit is computed as 12 cents per personal kilometre driven unless the extent of business usage exceeds 50% and the employee optionally elects to included one-half the standby charge as the operating cost benefit.

The automobile operating expense benefit, when formerly included in income under subparagraph 6(1)(a)(iii) of the Act, was more loosely constructed and required the inclusion of "the benefit related to the operation of the automobile". The Department's interpretation of this phrase was reflected in Interpretation Bulletin IT-63R4, paragraph 6. Our position was that the value of the benefit was net of any reimbursements of operating costs by the employee to the employer as well as direct payment of operating costs to third parties. However, the wording of new paragraph 6(1)(k), unlike its predecessor, provides a simple formula for determining the operating expense benefit of an employee where an automobile is provided to the employee by the employer and operating expenses are paid by the employer (our reference to employer and employee includes persons related thereto). Subparagraph 6(1)(k)(iii) clearly permits a reduction to the operating expense benefit only for amounts paid to the employer or a person related to the employer.

We hope our comments will clarify your understanding of the automobile operating expense benefit rules.

Yours truly,

J.A. Szeszycki
for Director
Business and General Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch