26 May 1998 External T.I. 9807195 - PERSONAL USE OF EMPLOYER VEHICLES

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: Personal Use of Employer Provided Vehicles

Position: Personal use taxable, benefit is calculated per 6(1)(a) and Regulation 7306 unless vehicle is an ‘automobile,’ where benefit is calculated under 6(1)(e) and 6(1)(k)

Reasons: Type of benefit calculation required dependent on vehicle and it’s use.

N. Graham
XXXXXXXXXX 	(613) 957-3499
		980719
May 26, 1998

Dear Madam:

Re: Personal Use of Employer Provided Vehicles

We are writing in response to your letter of March 11, 1998, in which you ask for our comments concerning your interpretation of the taxable benefits provided to certain of your employees who use employer-provided vehicles.

In your letter, you advise that you have four employees who are provided vehicles. You have two maintenance foremen that have 1/2 ton pickup trucks with tool boxes, along with the Transportation Director and an assistant. The Transportation Director has a 1/2 ton truck and his assistant drives a Jeep Cherokee. In all cases, the vehicles are used a portion of the time in the course of their employment and are driven home at night. The foremen are on call at night for school. The Transportation Director and the assistant may use their vehicles to check road conditions between their home and the office, or in emergency situations.

Currently, you have computed a taxable benefit for these employees on the basis that these vehicles are ‘motor vehicles’ within the Income Tax Act (“the Act”). The benefit has been computed as $0.29/km for the number of personal kilometers the employees drove in the year.

The situations that are described involve actual ongoing transactions involving specific taxpayers; consequently, your questions should be directed to your local Tax Services Office which has the responsibility for determining the tax consequences of completed transactions and their implications to the specific taxpayers. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments that may be of assistance.

Our Comments

The method of computing the benefit for the personal use of an employer-provided vehicle depends on whether that vehicle is an ‘automobile,’ as that term is defined in the Act. An automobile is a particular type of motor vehicle. While the purpose of the calculation is the same, the computation in respect of the use of an ‘automobile’ is dealt with in more detail in the legislation.

Specifically, an automobile is a motor vehicle designed to carry individuals on highways and streets and that has a seating capacity for not more than the driver and eight passengers. Excluded from this definition are vans or pick up trucks or similar vehicles:

1. that have a seating capacity for not more that the driver and 2 passengers and that in the year in which it is acquired, is used primarily for the transportation of goods or equipment in the course of gaining or producing income, or

2. the use of which, in the taxation year in which it is acquired, is all or substantially all for the transportation of goods, equipment or passengers in the course of gaining or producing income.

We would direct you to the above requirements when determining whether your employees are provided with motor vehicles or automobiles for the purposes of the benefit calculation. For example, the Jeep Cherokee does not meet the seating limitations noted under 1 above. To be excluded from the definition of an automobile, the use of this vehicle must meet the tests in 2. The phrase ‘all or substantially all’ is generally understood to mean ‘90% or more.’ Less than 90% use for the required purpose would result in the vehicle not meeting the exception test and being treated as an automobile for purposes of the benefit calculation. Record of the vehicle’s actual use should be kept to ensure a proper apportionment between personal and business use.

We refer you to Interpretation Bulletin IT-63R5, Benefits, Including Standby Charge for an Automobile, from the Personal Use of a Motor Vehicle Supplied by an Employer - after 1992, which we have enclosed, to supplement our comments in this letter. If a vehicle is an ‘automobile,’ the taxable benefit is computed as the sum of two amounts. First, there is the benefit associated with the operating costs related to the use of the automobile in the year that was not in connection with office or employment. This calculation is outlined in paragraphs 6 and 7 of IT-63R5. Second, there is a reasonable standby charge, based on a formula outlined in paragraphs 8 to 10 of IT-63R5.

If a vehicle is not an automobile, the personal use benefit for a motor vehicle is generally described in paragraph 23 of IT-63R5. Essentially, there is no standby charge for the availability of these vehicles, however, a taxable benefit under paragraph 6(1)(a) may apply. The benefit for the personal use of a motor vehicle is to be computed by the employer. The employer must reasonably estimate the fair market value to the employee of the benefit of the personal use of the motor vehicle. This benefit would be the amount an employee would have paid in an arm’s length transaction for the use of comparable transportation. The comparable cost of leasing such a vehicle plus the costs of operation of the vehicle may provide a reasonable measurement of benefit. The calculation of a benefit on the basis of an apportionment of the employer’s operating costs and capital cost allowance does not necessarily represent the value of the benefit unless that apportionment approximates the amount the employee would have had to pay for the use of the vehicle.

On the other hand, where a motor vehicle other than an automobile is essential to the employer’s business operation, and its only personal use is to provide transportation between an employee’s residence and the employer’s business premises, it may be appropriate to calculate the benefit to the employee on a cents-per-kilometer basis for equivalent automobile transportation. The rates prescribed in section 7306 of the Income Tax Regulations will usually be accepted in this situation. For 1997, Regulation 7306 states the kilometer rates to be $0.35 for the first 5,000 kilometers driven, and $0.29 for each kilometer thereafter. As requested, we are enclosing Regulation 7306 and the Department of Finance News Release which updates the amounts for 1996 and 1997.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Encl.

Regulation 7306. For the purposes of paragraph 18(1)(r) of the Act, the amount in respect of the use of one or more automobiles in a taxation year by an individual is the aggregate of:

(a) in respect of kilometres driven after 1987 for the purpose of earning income of the individual, the aggregate of

(i) 27 cents multiplied by the number of such kilometres, up to and including 5,000, driven in the year,

(ii) 21 cents multiplied by the number of such kilometres in excess of 5,000 driven in the year, and

(iii) 4 cents multiplied by the number of such kilometres driven in the year in the Yukon Territory or the Northwest Territories, and

(b) in respect of kilometres driven after August 1989 for the purpose of earning income of the individual, 4 cents multiplied by the number of such kilometres driven in the year.

Proposed Amendment --Reg 7306

Department of Finance news release, December 12, 1995:

Tax-Exempt Kilometre Limit

This limit restricts the amount that an employer can deduct for tax-free allowances paid to employees who use their personal vehicles for business purposes. The limit reflects the key cost components of owning and operating an automobile, such as depreciation, financing, and operating expenses (i.e., gas, maintenance, insurance and license fees). For 1996, the limit is increased by two cents a kilometre to 33 cents for the first 5,000 kilometres driven and 27 cents for each kilometre thereafter. The limits are four cents per kilometre higher in the Yukon and Northwest Territories to reflect the higher cost of maintaining and operation a vehicle in those regions.

The limits provide a system which is simple to administer for both businesses and their employees by permitting the deduction by businesses of reasonable reimbursement costs without requiring employees to include the amounts in income or to justify their actual automobile operating expenses. These rates do not limit the amount that employers can pay to employees who use their personal vehicles for business purposes. However, for employers to be able to deduct higher rates, the allowance must be judged reasonable by Revenue Canada and be included in the employee’s income. In such circumstances, employees fulfilling certain conditions, such as those who are required to use a vehicle to accomplish their work (e.g., salespersons), could then claim the actual automobile expenses they incur.

Proposed Amendment --Reg 7306

Department of Finance news release, December 23, 1996:

Tax-Exempt Kilometre Limit

This limit restricts the amount that an employer can deduct for tax-free allowances paid to employees who use their personal vehicles for business purposes. This limit reflects the key cost components of owning and operating an automobile, such as depreciation, financing, and operating expenses (i.e., gas, maintenance, insurance and license fees). For 1997, the limit is increased by two cents a kilometre to 35 cents for the first 5,000 kilometres driven and 29 cents for each kilometre thereafter. The limits are four cents per kilometre higher in the Yukon and Northwest Territories to reflect the higher cost of maintaining and operation a vehicle in those regions. The limit provides a system which is simple to administer for both businesses and their employees by permitting the deduction by businesses of reasonable reimbursement costs without requiring employees to include the amounts in income or to justify their actual automobile operating expenses. These rates do not limit the amount that employers can pay to employees who use their personal vehicles for business purposes. However, for employers to be able to deduct higher rates, the allowance must be judged reasonable by Revenue Canada and be included in the employee’s income. In such circumstances, employees fulfilling certain conditions, such as those who are required to use a vehicle to accomplish their work (e.g., salespersons), could then claim the actual automobile expenses they incur.