17 November 1997 Internal T.I. 9713577 - EMPLOYEE'S AUTOMOBILE EXPENSES

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:

1)Can employees of a CA firm deduct expenses against an allowance received ?

2)Can the employees claim CCA ?

Position:

1)Question of fact to be determined on a case by case basis
2)Employee would need to show that time available basis is more accurate than distance travelled basis

Reasons:

1)6(1)(b)(vii)

			November 17, 1997

	HALIFAX TSO	HEADQUARTERS
	Audit Services	C. Tremblay
(613) 957-2744
	Attention: Judy Harnett
			971357

Employee's Automobile Expenses

We are writing in response to your memorandum of May 22, 1997, wherein you requested clarification on the term "reasonable allowance" used in paragraph 6(1)(b) of the Act and the basis of measuring automobile use to a specific situation involving employees of a chartered accountancy firm. Specifically, you ask (1) whether they are permitted to include the reasonable allowance in income and deduct expenses against it and (2) whether they are permitted to claim CCA on the combined distance-time basis.

Generally, an employee would not be eligible to claim expenses under paragraphs 8(1)(h) and/or (h.1) if in receipt of an allowance for travelling or motor vehicle expenses respectively, that was excluded from income by virtue of the provisions in 6(1)(b) of the Act. Recent court decisions support this statement. In William Hudema v the Queen (94 DTC 6287), the fundamental question was whether or not the weekly car allowance being received by the taxpayer was "reasonable" within the meaning of subparagraph 6(1)(b)(v) of the Act, and if receipt of such an allowance was determined to be "reasonable" , it would preclude the taxpayer having access to the deductibility provisions in subparagraph 8(1)(f) and (h) of the Act. The decision was that the taxpayer had merely indicated that the allowance did not cover all of his expenses, which was not sufficient to prove that it was not "reasonable" in amount.

The decision in Eva Emily Carter v the Queen (95 DTC 303) is also relevant. She received from her employer a reasonable allowance for the use of the automobile in connection with employment duties. As a result, she was not permitted to deduct under paragraph 8(1)(h.1) of the Act any amount expended for automobile expenses incurred for travelling in the course of employment. The decision suggest that if an employee receives a reasonable allowance from the employer as a reimbursement for the use of an automobile in connection with employment duties, and is not required to include that allowance in income, no automobile expenses may be deducted when computing income.

After the enactment of Bill C-18, subparagraph 6(1)(b)(vii) of the Act was revised. The words used to read "...allowances (not in excess of reasonable amounts)..." and now read "...reasonable allowances..". Accordingly, an employee who receives an allowance for automobile expenses that is not reasonable because it is too low, may now add the allowance to his or her income and claim the relevant expenses.

In the situation at hand, the individuals receive a reasonable per KM allowance for expenses incurred while travelling out of town but are required to pay for any motor vehicle expenses incurred while travelling in town and otherwise meet all the requirements of subsection 8(1)(h) of the Act. Generally, in our view, employees can claim otherwise deductible travelling expenses that are of a different type than the ones for which a reasonable allowance was received but excluded from income by virtue of subparagraph 6(1)(b)(vii) of the Act. However, we are not inclined to agree that motor vehicle expenses for out-of-town travelling are a different type of travelling expense than are motor vehicle expenses for in-town travelling. Since they are both motor vehicle expenses, they are both one type of travelling expense and consequently, the administrative position set out in paragraph 34(a) of IT-522 would not apply. Accordingly, in order to avail themselves of the expenses permitted under paragraph 8(1)(h.1) of the Act, the employees would need to show that the allowance received in total is unreasonable. Where the employee's total expenses for business use in a year exceed the total travel allowance received in that year, the Department will accept that the allowance is not reasonable.

In our view, where a "motor vehicle" is used infrequently in the course of earning income from an office or employment, the apportionment must be on the distance-travelled basis alone, even though the vehicle is available at all times for employment purposes. In our view, "frequency" cannot be judged solely by the number of trips per week; each situation needs to be judged on its own merits to see if the distance based method distorts the true picture of employment related usage of the vehicle.

Accordingly, the question of determining whether there is a reasonable allowance is a question of fact to be determined on a case by case basis keeping in mind the circumstances of each employee.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch