17 February 2010 External T.I. 2010-0379641E5 - Automobile Taxable Benefits

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. Is a nominal administration fee a reasonable lease cost?
2. How do terminal credits affect automobile benefits? 3. What are the income tax implications when an employee purchases an employer leased vehicle?

Position: 1. Question of fact. 2. Generally reduces the lease cost.
3. Question of fact.

Reasons: 1. The lease cost used must be the amount payable by the employer to the lessor. 2. A terminal credit reduces the employer's lease cost in the year of receipt. 3. Where an employee purchases a previously leased vehicle either from the employer or directly from the lessor for less than FMV a taxable benefit results.

XXXXXXXXXX
									2010-037964
									Brenda White
									519-645-5454

February 17, 2011

Dear XXXXXXXXXX :

Re: Automobile Taxable Benefit

This is in response to your letter of September 2, 2010 wherein you asked several questions regarding the calculation of employee taxable benefits relating to employer-provided leased automobiles.

You have described two situations and posed several questions in each scenario. The first scenario deals with the calculation of an employee standby charge and operating expense benefit where an employer continues to lease an automobile beyond the lease term for a nominal administration fee (the "extended term"). At the end of the extended term the automobile is sold and the employer receives a terminal credit from the lessor. The second scenario deals with a situation where an employer-leased automobile is purchased by an employee from the lessor for the lower of fair market value (as established by the lessor) or the outstanding book value.

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 complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

For the purposes of paragraph 6(1)(e) of the Act, a reasonable standby charge is calculated pursuant to the formula in subsection 6(2) of the Act. The CRA's 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", and Guide T4130, "Employers' Guide- Taxable Benefits and Allowances" both provide explanations and examples of this calculation.

Where the automobile is leased, the standby charge is calculated based on 2/3 of the lease costs including any associated costs, such as maintenance contracts, excess mileage charges, terminal charges less terminal credits, and the GST/HST and PST that you pay to the lessor under the leasing contract but not including any amount payable to the lessor for insuring against the loss of, damage to or liability resulting from the use of the automobile. The lease cost of the automobile is also described in subsection 6(2) of the Act under variable E which states it is the total of all amounts that may reasonably be regarded as having been payable by the employer to a lessor for the purpose of leasing the automobile during such of the total available days as are days when the automobile is leased to the employer.

Where a lessor charges a lessee a nominal monthly amount for the use of its automobiles, the CRA will examine the consideration exchanged. We would first determine whether an arm's length relationship existed between the parties. Where an arm's length relationship is found, we would then look for the existence of a barter transaction. In this regard, we are aware that it is not uncommon for the use of automobiles to be provided in exchange for non-cash consideration. Some examples may include, but are not limited to:

• A commitment or obligation to renew existing and perhaps enter into future leases with the lessor;
• An agreement by the lessee to provide the lessor with financing to acquire vehicles or future vehicles to be leased; or
• Other services to be provided by the lessee.

Where the goods or services given up cannot readily be valued but the goods or services received can, the CRA will normally accept the value of the latter as being the price at which the transaction took place between the arm's length parties. For example, if it is the lessor's customary practice to sell its automobiles after the automobiles are returned at the expiration of the lease term, it would be reasonable to consider that a residual value is expected to be recovered by the lessor. As such the lessor would be expected to charge the lessee a lease amount, at a minimum, that equals the decrease in sale value of the automobile between the expiry date of the lease contract and the additional time that the lessee retains the automobiles for before returning them to the lessor.

In a straightforward transaction occurring at arm's length, where there is no evidence of a barter transaction, it would be acceptable for the actual administrative fee paid by an employer to be used in the calculation of the standby charge benefit of its employees, since that is the amount "that may reasonably be regarded as having been payable by the employer to a lessor for the purpose of leasing the automobile" referred to in variable E of the formula in subsection 6(2) of the Act.

As noted in Guide T4130, where the lessee receives a lump sum payment from the lessor at the end of a lease the amount is considered a terminal credit. When this happens, it suggests that the standby charge for the automobile has been overstated since the lease costs should have been lower. In this situation, an employer can use one of the following methods:

• deduct the terminal credit from the lease costs in the year the lease ends; or
• amend the T4 or T4A slip of the employee who used the automobile and provide a letter explaining the reduction, as long as the employee agrees and can still request an income tax adjustment for the years in question. However, if the employee(s) does not agree (or are not unanimous in agreement) or any of the relevant returns are statute-barred, then the opportunity is not available.

If the employer chooses to apply the terminal credit in the current year the employee's agreement is not required and there is no option for an employee to decline to have the terminal credit applied.

Whether zero is a reasonable standby charge would be a question of fact based on the circumstances. In our view, a negative standby charge cannot exist. In certain situations, where the total lease costs in the year the lease ends are less than the terminal credit a zero stand by charge may be reasonable. It would follow that where all of the conditions of subparagraphs 6(1)(k)(i) - (iv) are met, an operating expense benefit based on the optional method may be zero.

If a lease agreement is specifically structured in such a way as to set out a higher charge at the beginning of the term followed by a nominal charge in the latter part of the lease, the CRA would expect that the employer would average out the monthly lease charge for standby charge purposes, by dividing the total lease cost over the term of the lease.

Subject to certain exceptions, paragraph 6(1)(a) of the Act requires that the value of any benefit received or enjoyed by a taxpayer in the year in respect of, in the course of, or by virtue of an office or employment be included in the taxpayer's income from employment. Where an employee purchases a vehicle previously leased by the employer either from the employer or directly from the lessor for less than fair market value ("FMV"), the broad wording of paragraph 6(1)(a) would include the excess of the FMV over the amount paid as a taxable benefit in the employee's income.

In these types of circumstances, the CRA is prepared to consider that the employer will have effectively received a "terminal credit" that is equal to the amount of the employee's taxable benefit under paragraph 6(1)(a) of the Act for the purpose of computing the employee's standby-charge under the rules in paragraph 6(1)(e) and subsection 6(2) of the Act. Accordingly, the employer could compute the employee's standby-charge taking into account the amount of the "terminal credit" in the year the leased automobile is acquired by the employee by following one of the two methods described in Chapter 2 of Guide T4130 provided the other conditions described therein are otherwise met.

The GST implications regarding employer responsibilities on employee taxable benefits are discussed in detail in chapter 5 of Guide T4130 as well as on the CRA website at the following pages:

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/gst-tps/mply-eng.html and http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/tmbl/bnfts/rprtng-eng.html

We trust these comments will be of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch