22 October 1996 External T.I. 9627685 - EMPLOYER-PROVIDED AUTOMOBILES

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.In 1996, can the 6(1)(k) benefit be avoided if the amounts paid by employer are reimbursed in full? 2. If two vehicles are used by the employee, one for less than 10% peronal use and one for slightly more, is there an averaging out? 3. Where a vehicle is transferred to another province and another PST incurred, how is the second PST treated for standby charge purposes? 4. Does the position regarding proration of terminal charge or credit apply if there is less than 100% unanimity or all returns of affected employees are available for reassessment? 5. If a lease is structured to drop the monthly charge to a nominal amount for the latter part of the lease, is there a requirement to even out the monthly charge?

Position:

1.Paragraph 6(1)(k) has not changed in that regard. 2. The standby charge is computed separately for each vehicle unless there is no assignemnt of a specific vehicle. 3. The cost of the vehicle for standby charge purposes includes any PST charges incurred. 4. No, the opportunity for matching the charge ideally is lost if certain returns are not available or employees are not in agreement. 5. Using the same principle as set out in paragraph 13 of IT-63R5 to the prorating of beginning lumpsum payments to the rest of there term we expect monthly charges to be spread evenly over the term of the lease, however, there is room for case by case consideration.

Reasons:

Basic principles are contained in IT-63R5 for consistent measurement of standby charge benefits to employees.

									962768
XXXXXXXXXX							J.A. Szeszycki

Attention: XXXXXXXXXX

October 22, 1996

Dear Sirs:

Re: Employer-Provided Automobiles

This is in reply to your letter dated August 14, 1996 in which you requested clarification regarding the automobile benefit rules as they may apply to the 1996 taxation year. We will respond to your specific questions in the order presented.

1.Question: We understand no benefit for operating expenses will accrue where the employee fully reimburses the employer for all operating expenses attributable to personal use within 45 days after the end of the year. Is this option available for the 1996 taxation year?

Response: The computation of the operating cost benefit for the personal use of employer-provided automobiles is not triggered if, as set out in subparagraph 6(1)(k)(iii) of the Income Tax Act ("Act"), the total of any amounts paid or payable by the employer in respect of such use is repaid in full within 45 days of the end of the year. This provision has not changed for the 1996 taxation year.

2.Question: Where the employer drives two vehicles during the year, the first one results in personal usage of 4% and the second 13%, does the employee qualify for the 90% rule on the combined personal usage, assuming the combined personal usage is less than 10%, or just on the first vehicle?

Response: As indicated in paragraph 20 of interpretation bulletin IT-63R5, dealing with benefits derived from the use of employer-provided vehicles, the standby charge for different automobiles is ordinarily determined separately for the specific period in which each automobile is made available to the employee. The exception to that rule is in circumstances where the employee has the use of more than one vehicle in the period but is not assigned to one exclusively for that period. If such are the circumstances, then the pooling method as described in the bulletin may be used.

3.Question: In the case of a company-owned vehicle, where the vehicle is transferred to another province and provincial sales tax is paid again on the transferred vehicle to the second province, which amount forms the cost basis...the original cost plus PST for the original province, the original cost plus the PST for both provinces, the original cost plus the PST for the second province, or the cost basis used to establish the PST in the second province plus the PST paid to the second province? It is your understanding that the standby charge is based on the "original" cost of the vehicle which would include original PST but not the subsequent PST.

Response: The cost of the company-owned vehicle on the books of an employer would be the original cost, which includes any provincial sales tax(es) paid, plus any subsequent additional costs of a capital nature. In our view, all provincial sales taxes would be included in the cost of the vehicle on the books of the employer and would therefore increase the standby charge cost base in the year of its transfer.

4.Question: Where there is a terminal credit, can the credit be applied in full in the year in which it is received or does it have to be pro-rated over the life of the vehicle? If it is over the life of the vehicle, and there was more than one driver assigned to the vehicle (i.e., a former employee), who receives the credit...the current driver or all previous drivers?

Also, paragraph 12 in IT-63R4 (paragraph 13 in IT-63R5) states "If there are terminal charges and credits and the employee(s) and the employer agree, the taxable benefit arising from the lease payments will be adjusted over the term of the lease provided that none of the relevant years are statute-barred". Does that mean that if one year is statute-barred, the paragraph does not apply?

Response: Recognizing that a terminal credit or charge is, in effect, a retrospective adjustment to the monthly lease charges over the full term of the lease, the position in the bulletin describes an opportunity to match the standby charge to the actual periods to which it relates, despite the general cash basis method of reporting salary and benefits for an employee. 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 lost, since the matching would otherwise be inaccurate.

5.Question: You have requested clarification of our previous response to you concerning the treatment of the lease costs for standby charge purposes if the lease payments are reduced to a nominal amount after the initial lease term. You wish us to reconsider our response using the assumption that the leasing agreement is a bona fide operating lease and both parties are dealing at arm's length.

Response: The lease charge on an automobile is normally based on its original cost, the expected usage over the term of the lease agreement and the expected residual value of the automobile at the end of the term based on that expected usage. The total cost of the lease is then translated into (equal) monthly payments chargeable to the lessee. The Department sets out a position in paragraph 13 of IT-63R5, with respect to circumstances where a substantial lump sum lease payment is made at the beginning of the lease, wherein the employer is required to even out the monthly lease payments in determining the standby charge of the employee. Similarly, we expect that if a lease agreement is 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 employer would even out the monthly lease charge, for standby charge purposes, by dividing the total lease cost over the term of the lease. Any variations on this approach should be considered on a case by case basis.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch