12 September 1997 Internal T.I. 9716457 - WHETHER REQUIRED BY CONTRACT TO PAY EXPENSE

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)Are employees considered to be required under the contract of employment to pay motor vehicle expenses if their contract is silent on the issue?

2)Does the receipt of a per kilometre allowance calculated at XXXXXXXXXX% of the rate in paragraph 7306 of the Regulations preclude the employees from deducting motor vehicle travel expenses under paragraph 8(1)(h.1) of the Act?

3)Are employees entitled to deduct motor vehicle expenses under paragraph 8(1)(h.1) of the Act if they elect not to draw on an allowance made available by their employer?

Position:

1)Perhaps. It must be tacitly understood by the employer and the employee that the latter is required to pay the motor vehicle expenses.

2)Yes, if the allowance received is not included in income because of paragraph 6(1)(b).

3)Yes.

Reasons:

1)Administrative position taken on file E942762 which was based on Rozen v. the Queen.

2)Whether allowance is reasonable is a question of fact. It is not because the allowance is calculated at XXXXXXXXXX% of the amount the Department considers to be a reasonable per kilometre allowance that the allowance is not reasonable. Although the amounts of the prescribed limits are generally accepted as reasonable, those limits are not considered to define "reasonable."

3)It is the receipt of an allowance under subparagraph 8(1)(h)(iii), and not its availability, that prevents the deduction under paragraph 8(1)(h.1).

			September 12, 1997

	WINNIPEG TAX CENTRE	HEADQUARTERS
	Refund Examination     Roxane Brazeau-LeBlond, CA
(613) 957-8953
	Attention:  S. Browning
			971645

Employee travel expenses

This is in reply to your memorandum dated June 16, 1997 requesting our views on travel expenses of employees of XXXXXXXXXX.

XXXXXXXXXX

Questions

You requested our comments on the following questions:

1)Are the employees considered to be "required under the contract of employment to pay motor vehicle expenses incurred in the performance of the duties of the office or employment" as required by subparagraph 8(1)(h.1)(ii) of the Income Tax Act (the "Act") if their contracts make no reference to the employees paying motor vehicle expenses?

2)Does the receipt of an allowance calculated at "XXXXXXXXXX% of the maximum tax exempt per kilometre allowance allowed by Revenue Canada" preclude the employees from deducting motor vehicle travel expenses under paragraph 8(1)(h.1) of the Act?

3)Are employees entitled to deduct motor vehicle expenses under paragraph 8(1)(h.1) of the Act if they elect not to draw on an allowance made available by their employer?

Our comments

Provided the requirement in subsection 8(10) of the Act is satisfied, an employee is entitled to deduct, under paragraph 8(1)(h.1) of the Act, amounts spent in the year for motor vehicle expenses, as long as the amounts are reasonable in the circumstances and the employee is ordinarily required to carry on the duties of the office or employment away from the employer's place of business or in different places and the employee is required, under the contract of employment, to pay travel expenses incurred in the performance of the duties of the office or employment. In addition, the employee must not have claimed any deduction for the year under paragraph 8(1)(f) of the Act, and must not be in receipt of an allowance for motor vehicle expenses that was excluded from income by virtue of paragraph 6(1)(b) of the Act.

Subparagraph 6(1)(b)(vii.1) of the Act provides that an allowance received by an employee from the employer for the use of a motor vehicle for travelling in the performance of the duties of the employment will not be included in the employee's income as long as the allowance is reasonable. Subparagraphs 6(1)(b)(x) and (xi) of the Act deem an allowance received in a taxation year by an employee for the use of a motor vehicle in connection with, or in the course of, an office or employment not to be a reasonable allowance for the purposes of subparagraph 6(1)(b)(vii.1) of the Act when:

(a)the allowance is not calculated solely by reference to the number of kilometres for which the vehicle was so used in the year, or

(b)the employee receives an allowance for use of the vehicle and is reimbursed in whole or in part for expenses for the use of the vehicle in the year in connection with the office or employment except where the reimbursement is for supplementary business insurance or toll or ferry charges and the amount of the allowance is determined without reference to those reimbursed expenses.

With regards to the particular situation of the travelling employees of XXXXXXXXXX, they may deduct motor vehicle expenses if the requirements of paragraph 8(1)(h.1) and subsection 8(10) of the Act are met. If XXXXXXXXXX reissues Form T2200 for its travelling employees, the condition under subsection 8(10) of the Act would be met. We understand that the requirement in subparagraph 8(1)(h.1)(i) is also met.

Ordinarily, the condition in subparagraph 8(1)(h.1)(ii) that the employee is required, under the contract of employment, to pay travel expenses incurred in the performance of the duties of the office or employment, necessitates that there be an express requirement within the terms of a written contract of employment. However, it is the Department's general position that this requirement may also be considered to have been satisfied where it is tacitly understood by the employer and the employee that the employee will pay the travel expenses. This will be a question of fact and can only be determined through a review of the circumstances present in each case. In order to determine if an expense incurred by an employee was actually an implied requirement of the contract of employment, the Courts have reviewed whether or not the failure to meet the requirement could result in the cessation of employment, poor performance evaluation or other disciplinary action on the part of the employer.

However, it is our view that the condition in subparagraph 8(1)(h.1)(ii) is not met when an employee receives a full reimbursement for the motor vehicle expenses incurred in the course of carrying on the duties of employment away from the employer's place of business. On the other hand, the fact that an allowance for motor vehicle expenses incurred in the course of carrying on the duties of employment is available to an employee does not invalidate the fact that the employee may be required to pay travel expenses incurred in the performance of the duties of the office or employment and that the requirement of subparagraph 8(1)(h.1)(ii) may be met.

The travelling employees of XXXXXXXXXX who receive only the allowance calculated at "XXXXXXXXXX% of the maximum tax exempt per kilometre allowance allowed by Revenue Canada" may be prevented, under paragraph 8(1)(h.1)(iii), from deducting their motor vehicle expenses if the allowance they receive is excluded from their income because of paragraph 6(1)(b) of the Act. This would be the case, by virtue of subparagraph 6(1)(b)(vii.1), if the allowance is considered to be "reasonable."

As a general rule, the Department accepts as reasonable an allowance based on the per-kilometre amounts as prescribed under section 7306 of the Regulations if such allowance is not materially different from that which would otherwise be considered reasonable. However, that is not to say that an allowance based on XXXXXXXXXX% of the per-kilometre amounts as prescribed under section 7306 of the Regulations is not a reasonable allowance. In our view, the question of the reasonableness of an allowance is a question of fact which must be dealt with on a case by case basis, taking into consideration each employee's circumstances. The Department generally takes the view 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.

However, an allowance for travel expenses is not considered unreasonable merely because the employee's total expenses for business travel exceed the total travel allowances received in the year. In this regard, in William H. Gauvin v. the Minister of National Revenue, 79 DTC 696 the Tax Review Board expressed the following views:

"While it (the mileage allowance) might be "low" in the view of the appellant, to be "unreasonably low" would require, as I see it a mileage allowance set below the standard or reasonable amount for the functions it was intended to reimburse, not merely lower than the total operating costs incurred."

A similar view was reiterated more recently in William Humeda v. Her Majesty the Queen, 94 DTC 6287 (T.R.B.) where the judge stated:

"The burden was on him (the Plaintiff taxpayer) to show that it (the allowance) was unreasonable, the Minister having taken the position that it was a reasonable allowance. It was not enough in my view for the Plaintiff simply to show that the allowance did not cover all of the expenses which he incurred." (our underlining)

The allowance that consists of a flat monthly amount in addition to a per-kilometre amount appears to be in respect of the same use for the motor vehicle. Therefore, these amounts cannot be viewed as constituting two separate allowances. Consequently, it would appear that travelling employees of XXXXXXXXXX who receive such an allowance have received, as have those who receive a flat monthly amount, an allowance that is deemed, under subparagraph 6(1)(b)(x) of the Act, not to be a reasonable allowance. Accordingly, the full amount of these allowances would be included in the employee's income. As a result, these employees would not be prevented by paragraph 8(1)(h.1)(iii) from deducting their motor vehicle expenses.

In addition, travelling employees of XXXXXXXXXX who choose not to receive any allowance for motor vehicle expenses are not prevented by paragraph 8(1)(h.1)(iii) from deducting their motor vehicle expenses since they do not "receive" any allowance for motor vehicle expenses.

R. Albert
for Director
Business and Publications Division
Income tax Rulings and
Interpretations Directorate
Policy and legislation Branch