15 July 2010 External T.I. 2010-0361991E5 - Personal use of employer's 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.

Principal Issues: 1. Whether personal use of City emergency vehicles by on-call firefighters results in a taxable benefit. 2. Whether personal use of City pick-up trucks by on-call staff results in a taxable benefit. 3. What specialized equipment and/or costs are included in the standby charge and/or operating expense benefit?

Position: 1. Yes. 2. Yes. 3. Various.

Reasons: 1. 6(1)(a) 2. Either 6(1)(a) or 6(1)(e) & (k) depending on whether or not the vehicle is considered an "automobile". 3. Per IT-63R5 and 6(1)(e), specialized equipment is not included in the cost of the vehicle for the purposes of the standby charge. Per 6(1)(k), the amount of the operating benefit is not contingent on the type of maintenance charges paid for by the employer.

XXXXXXXXXX 				2010-036199
					Tom Posadovsky CMA
					(613) 952-8283
July 15, 2010

Dear XXXXXXXXXX :

Re: Technical Interpretation Request - Personal Use of Employer's Vehicles.

I am replying to your letter of March 26, 2010 concerning whether certain employees of the City of XXXXXXXXXX (the "City") incur a taxable benefit for the personal use of City vehicles. We apologize for the delay in our response.

According to your letter, the vehicles in question include: (i) pick-up trucks marked with sirens and decals designating them as emergency vehicles, available to firefighting staff twenty-four hours a day so that they can respond to fire emergencies at all hours; and (ii) non-emergency pick-up trucks marked with City decals provided to public works employees required to be on "standby" for two weeks at a time.

You did not indicate whether employees are required to take the employer-provided vehicles home each day in the event that it is necessary to respond to a fire or non-fire emergency outside of regular business hours for the employer. Further, there was no indication whether the employees are permitted to use the vehicles for personal travel other than between home and work, or whether the vehicles are considered to be "automobiles" for income tax purposes.

In the situation where a benefit is applicable, you ask what costs should be included in the calculation beyond parts, repairs, car washes, and fuel. Further, you wish to know whether radios and other emergency equipment, required to be installed or carried in the vehicles, are included as part of the total used to calculate the standby charge.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to offer the following comments in respect of the issues that you raised. Please note that these comments are of a general nature only and are not binding on the CRA.

Our Comments

When an employer such as the City makes a motor vehicle available for an employee's personal use, it generally gives rise to a taxable employment benefit. The use of the City-provided vehicle by an employee to travel between his or her home and a regular place of employment is considered personal notwithstanding that the vehicle may be required because the employee is "on call" for emergency or other "standby" purposes. However, where the employee proceeds directly from home to a point of call, such as to the location of a fire, accident or another worksite, other than the employer's place of business to which the employee regularly reports, or returns home from such a point, the use of the vehicle is considered employment-related.

The method you will use to calculate the appropriate employment benefit with respect to the personal use of a City vehicle by an employee depends on whether a particular vehicle is considered to be a "motor vehicle" versus an "automobile" as defined in subsection 248(1) of the Income Tax Act (the "Act").

A "motor vehicle" is an automotive vehicle designed or adapted for use on highways and streets. It does not include a trolley bus or a vehicle designed or adapted for use only on rails. An "automobile" includes a motor vehicle that is designed or adapted mainly to carry individuals on highways and streets, and has a seating capacity of not more than the driver and eight passengers. Among several exceptions, an "automobile" does not include an ambulance or clearly marked police, fire or medical emergency-response vehicles. Also excluded from the definition are vans, pick-up trucks, or similar vehicles that:

• can seat no more than the driver and two passengers, and in the year it is acquired or leased, is used primarily to transport goods or equipment in the course of business; or
• in the year it is acquired or leased, is used 90% or more of the time to transport goods, equipment, or passengers in the course of business.

Whether a vehicle owned or leased by the City and provided to an employee is considered to be an "automobile" is a question of fact. For example, a clearly marked police or fire emergency-response vehicle is a "motor vehicle" for the purposes of the Act as it is specifically excluded from the definition of an "automobile". The pickup truck used by your public works employees may also be excluded depending on such factors as seating capacity and percentage of business use; the fact that a pick-up truck displays the City's decal is not a factor in this determination.

In the case where you have otherwise determined that a vehicle is considered an "automobile", as defined in subsection 248(1) of the Act, the taxable benefit arising on the personal use and availability of the automobile is included in the employee's income under paragraph 6(1)(e) of the Act as a "standby charge". Where the City pays any of the operating costs of the automobile, an "operating expense benefit" is also included in the employee's income under paragraph 6(1)(k) of the Act. The calculation of the standby charge and operating expense benefit is explained in 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 ("IT-63R5"), and Guide T4130, Employers' Guide - Taxable Benefits and Allowances 2009 ("T4130").

Under the assumption that the City owns the automobile, the cost for determining the standby charge is the total of the following two amounts:

1) the purchase price of the automobile, including options, accessories, and GST/HST and PST, but not including any reduction for trade-in; and

2) the cost of additions (including GST/HST and PST) made to the automobile after it was purchased (added to the capital cost of the automobile for depreciation).

Any specialized equipment added to the automobile to meet the requirements for employment such as: cellular phones, two-way radios, heavy-duty suspension, and power winches, are not normally considered to be part of the automobile's cost for purposes of calculating the standby charge. In relation to your query, it would be a question of fact as to what additions would be considered as "specialized equipment" and depends on the purpose and use of the particular vehicle.

An operating expense benefit is determined by using either the optional or fixed-rate calculation, less any reimbursements provided by the employee. The fixed rate for 2009 and 2010 is 24¢ per kilometre of personal use (including GST/HST and PST). The optional rate is equal to half of the standby charge before deducting any reimbursements, but can only be used if certain conditions are met. Per IT-63R5, operating costs include, but are not limited to: gasoline, oil, maintenance charges, repair expenses (net of insurance proceeds), licences and insurance. Operating costs do not include: interest, capital cost allowance for an automobile that is owned by the employer, lease costs for a leased automobile or parking costs.

Accordingly, what expenditures constitute additional "operating costs" beyond the examples provide in IT-63R5 is a question of fact and will likely depend on the type of vehicle, such as special purpose vehicles, emergency vehicles, etc. and any particular needs the vehicles require to operate as intended. It should be noted that any incremental operation costs are not a factor in the calculation of the operating benefit, under either the fixed rate or optional method, if the employer is already paying normal operating costs such as gas, oil, licenses, insurance and regular maintenance.

Where you have determined that a vehicle the City is providing to an employee is excluded from the definition of an "automobile", as in the case of a clearly marked fire emergency-response vehicle, an employee is not subject to the standby charge or operating benefit for the availability of the motor vehicle. However, a taxable benefit will still apply for any personal use under paragraph 6(1)(a) of the Act. Generally, the amount of the employment benefit is based on a reasonable estimate of the fair market value of the benefit, including GST/HST, derived by the employee. The value of the benefit can vary in differing circumstances depending upon such factors as the extent of personal use.

As explained in paragraph 23 of IT-63R5, where a motor vehicle that is not 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-kilometre basis for equivalent automobile transportation. The CRA generally accepts the rates prescribed in section 7306 of the Income Tax Regulations (the "Regulations") for this purpose. This rate reflects the key cost components of owning and operating an automobile, such as depreciation, financing, insurance, maintenance and fuel costs, and is a reasonable indicator of the benefit enjoyed by an employee for the personal use of an employer-provided motor vehicle that is not an automobile. For 2009 and 2010, in most areas of Canada, the rate is 52 cents per-kilometre for the first 5,000 kilometres driven and 46 cents for each additional kilometre.

Please note that there may be some situations where the rate prescribed in section 7306 of the Regulations does not reflect the economic benefit enjoyed by the employee for the personal use of the employer's motor vehicle and therefore, a benefit calculated using a lower rate is more appropriate. In Income Tax Technical News No. 40, the CRA recently announced a change to the administrative policy regarding the determination of a reasonable motor vehicle benefit under paragraph 6(1)(a) of the Act. The new policy is described on page 29 of Guide T4130, wherein it states that the CRA will generally accept the operating benefit rate as prescribed in section 7305.1 of the Income Tax Regulations (i.e., 24 cents per kilometre for the 2009 and 2010 taxation years) to represent a reasonable benefit for the personal use of the vehicle, where all of the following conditions are met:

1) The motor vehicle is not an automobile;

2) The employee is told in writing that he or she cannot make any personal use of the vehicle, other than travelling between work and home. The employee maintains full logbooks of the vehicle's use as proof that there was no other personal use;

3) There are valid business reasons for making the employee take the vehicle home at night, such as:

a) it would be unsafe to leave tools and equipment at the employer's premises or on a worksite overnight; or

b) the employee is on-call to respond to emergencies (i.e., relating to the health and safety of the general population or to a significant disruption to the employer's operations), and the vehicle is provided so the employee can respond more effectively to emergencies.

4) The motor vehicle is specifically designed or suited for the business or trade and is essential for the performance of the employee's duties. Simply transporting the employee to the work location does not meet the condition of "essential in the performance of employment duties". The following examples meet both conditions (see T4130 for more examples):

a) The vehicle is designed, or significantly modified, to carry tools, equipment, or merchandise. The employee must have the vehicle present to do his or her job.

b) The vehicle, such as a pick-up truck or a van, is suitable for and is consistently used to carry and store heavy, bulky, or numerous tools and equipment and it would be difficult to load and unload the contents. The vehicle is essential to the employee in performing his or her job.

c) The employee is on call for emergencies (such as those described above), and has to use a vehicle which:

• is a clearly marked emergency-response vehicle;
• is specially equipped to respond rapidly; or
• is designed for the purpose of carrying specialized equipment to the scene of an emergency.

Again, should any of the four conditions explained above not be met, the employment benefit is calculated based on the rates prescribed in section 7306 of the Regulations (i.e., 52 cents per kilometre for the first 5,000 kilometres driven and 46 cents for each additional kilometre in 2009 and 2010).

Further information regarding the definition of an automobile and the calculation of employment benefits arising from the provision of employer-owned or leased vehicles to employees is available in 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 as well as T4130, Employers' Guide - Taxable Benefits and Allowances 2009, both of which are available on our website.

We trust that these comments have been of assistance.

Yours truly,

Randy Hewelett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch