10 January 2003 External T.I. 2002-0174635 - REASONABLE EMPLOYEE AUTOMOBILE ALLOWANCE

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether an automobile allowance for purpose of subparagraphs 6(1)(b)(v), (vi) or (vii.1) of the Act is reasonable when it differs from the amount prescribed in section 7306 of the Regulations.

Position: Question of fact, but it is possible, unless excluded by virtue of subparagraphs 6(1)(b)(x) or (xi) of the Act.

Reasons: An allowance designed to cover an employee's out-of-pocket costs to use the automobile in the course of performing the duties of employment, is considered reasonable for the purpose of paragraph 6(1)(b) of the Act. The prescribed amount in section 7306 of the Regulations is only for the purpose of determining the amount deductible by the employer under paragraph 18(1)(r) of the Act.

XXXXXXXXXX 2002-017463

Randy Hewlett, B. Comm.

January 10, 2003

Dear XXXXXXXXXX:

Re: Reasonable Employee Automobile Allowance

We are writing in response to your letter of November 19, 2002, wherein you request our opinion on the above noted issue.

In your letter, you describe a situation in which an employer pays its employees an automobile allowance of $0.37 per kilometre for using their personal vehicle in connection with the duties of employment. The allowance is based solely on the number of kilometres driven by the employees and will remain at $0.37 per kilometre regardless of the total kilometres travelled in the year. You request our views on whether the allowance is reasonable for the purpose of computing taxable employment benefits under the Income Tax Act (the Act). Your general concern is that the amount is not equivalent to the amount prescribed in section 7306 of the Income Tax Regulations (the Regulations).

Our Comments

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 an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following comments.

An automobile allowance will be considered reasonable for the purpose of determining if it is excluded from employment income by virtue of subparagraphs 6(1)(b)(v), (vi) or (vii.1) of the Act, if the per-kilometre rate is designed to cover an employee's out-of-pocket costs to use the automobile in the course of performing the duties of employment. Section 7306 of the Regulations prescribes the amount of an automobile allowance considered reasonable for the purpose of determining deductibility by the employer in accordance with paragraph 18(1)(r) of the Act. While the prescribed amount in section 7306 of the Regulations is generally accepted as being reasonable for the purpose of subparagraph 6(1)(b) of the Act, an amount that differs may also be considered reasonable.

You should also note that for the purpose of subparagraphs 6(1)(b)(v), (vi) or (vii.1) of the Act, an automobile allowance is deemed not to be reasonable by virtue of subparagraph 6(1)(b)(x), if it is not based solely on the number of kilometres for which the automobile is used in connection with or in the course of performing the duties of employment. Further, an automobile allowance is also deemed not to be reasonable by virtue of subparagraph 6(1)(b)(xi) of the Act, if the employee receives both an allowance in respect of the use of the automobile and is reimbursed in whole or in part for expenses in respect of that use (except where the reimbursement is in respect of supplementary business insurance or toll or ferry charges and the amount of the allowance was determined without reference to those reimbursed expenses).

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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