9 August 1995 Internal T.I. 9519696 - REASONABLE AUTOMOBILE ALLOWANCE AND G.S.T.

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 automobile allowances provided on a flat rate diem and per kilometre basis would be considered reasonable for income tax purposes.

Position TAKEN:

The flat rate allowance would be deemed not to be reasonable but the per kilometre allowance that is otherwise factually reasonable as to quantum would be considered reasonable for income tax purposes.

Reasons FOR POSITION TAKEN:

There are two allowances in respect of different usage of the automobile. As a result, subparagraph 6(1)(b)(x) does not have application to the per kilometre allowance but applies to the flat allowance.

		August 9, 1995

H. L. Jones	HEADQUARTERS
	Director	J.A. Szeszycki
	General Applications Division	(613) 957-8953
	GST Rulings and Interpretations
		951969

Automobile Allowances Paid to Employees

This is in reply to your memorandum of July 21, 1995 in which you requested our views as to the reasonableness of automobile allowances provided by XXXXXXXXXX

to its employees for the use of their personal vehicles. We also acknowledge our telephone conversations (Szeszycki/Lafond) of July 27 and August 2 in which we clarified certain aspects of XXXXXXXXXX allowance policy.

It is our understanding of the information provided in your memorandum, as supplemented by the original enquiry that was attached, that XXXXXXXXXX automobile allowance policy includes the following elements:

XXXXXXXXXX

In the application of section 174 of the Excise Tax Act (the ETA) a determination must be made not only as to the overall deductibility of automobile allowances paid to employees in computing the income of the company for income tax purposes but also as to the reasonableness of the allowances in the context of paragraph 6(1)(b) of the Income Tax Act (the Act).

Automobile allowances paid by an employer to its employees are usually a deductible expense to the employer, either as a normal operating expense for the use of an automobile for business purposes or as a benefit provided to employees to the extent that the allowance covers the personal usage by employees. Although the allowances are deductible, paragraph 18(1)(r) of the Act sets prescribed limits (Income Tax Regulation 7306) on the deductibility of automobile allowances in instances where the allowance is not required to be included in the income of the employee.

In general terms, the reasonableness of any particular allowance is a question of fact. Although the amounts of the prescribed limits referred to above are generally acceptable as reasonable, those limits are not considered to define the term "reasonable". The Department generally takes the view, for income tax purposes, that any allowance that is intended or designed to cover the employee's out-of-pocket costs to use the vehicle in the course of performing the duties of employment would be a reasonable allowance.

In the context of motor vehicle allowances described in subparagraphs 6(1)(b)(v), (vi), and (vii.1) of the Act, there are additional reasonableness criteria that must be met before such an allowance can be considered reasonable. Subparagraphs 6(1)(b)(x) and (xi) of the Act impose a further qualification by deeming not to be reasonable, any allowance that is not based exclusively on a per kilometre basis for the employment-related use of the vehicle or any allowance that is provided in conjunction with a reimbursement in respect of the employment-related use of the vehicle (other than the reimbursement of supplementary business insurance and toll/ferry charges not already included in those allowances).

The allowances described in both 1 and 2 above; i.e., the flat rate and the per kilometre rate for kilometres in excess of 120, appear to be in respect of different usage of the vehicle. The flat rate appears intended to relate to usage of the vehicle up to the first 120 kilometres. As a result, we would view an employee who travels in excess of 120 kilometres in a day to be in receipt of two separate allowances. Subject to our earlier comments concerning the reasonableness of the amounts themselves, the allowance based on a per kilometre rate would appear to qualify as a reasonable allowance for the purposes of subparagraphs 6(1)(b)(v), (vi) and (vii.1) of the Act. The flat rate allowance is an allowance that would be deemed not to be reasonable for income tax purposes by virtue of subparagraph 6(1)(b)(x) of the Act and would be required, therefore, to be included in the employee's income.

B.W. Dath
Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch