13 October 1999 Income Tax Severed Letter 9923976 - TAXATION OF MOTOR VEHICLE ALLOW.

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: Whether a $XXXXXXXXXX per km motor vehicle allowance should be included in employee's incomes, and whether employers' deductions would be limited.

Position: Under paragraph 18(1)(r), in order for an employer to deduct more than the prescribed amount, the allowance must, according to Press Releases, be judged reasonable by Revenue Canada, and be included in the employee's income. To be included in an employee's income it cannot be a reasonable allowance for purposes of 6(1)(b)(vii.1)

Reasons: Finance Press Release 98-127

REVENUE CANADA REVENU CANADA

MEMORANDUM NOTE DE SERVICE

DATE October 13, 1999

Ú                                                                                              ¿
  TO       GST/HST Rulings and Interpretations                   FROM      Income Tax Rulings and
  À            Directorate      				         DE        Interpretations Directorate
             General Operations Unit                                                          Wayne Antle
(613) 957-2058
          Attention: Adrien Venne, Director
À                                                                                              Ù
                                                                                                          FILE      1999-000449
                                                                                                   DOSSIER

SUBJECT:

OBJET: XXXXXXXXXX

We are writing in response to your request of August 23, 1999, concerning the income tax treatment of vehicle allowances paid by XXXXXXXXXX employers to employees who are XXXXXXXXXX.

XXXXXXXXXX

Our comments

Subparagraph 6(1)(b)(vii.1) of the Income Tax Act (the "Act") excludes from employment income a reasonable allowance for the use of a motor vehicle received by an employee, other than a commission sales employee, for travelling in the performance of the duties of office or employment. An employee in receipt of a motor vehicle allowance that is excluded from income would not be permitted to deduct motor vehicle expenses under paragraph 8(1)(h.1) of the Act. In addition, paragraph 18(1)(r) of the Act, and section 7306 of the Income Tax Regulations, limits the amount that an employer can deduct in respect of a tax-exempt allowance paid to an employee for the business use of an automobile unless the amount is required to be included in the employee's income.

In general terms, the reasonableness of any particular allowance referred to in subparagraphs 6(1)(b)(v), (vi), or (vii.1) is a question of fact. Although the amounts of the prescribed limits in Regulation 7306 are generally acceptable as reasonable, those limits are not considered to define the term "reasonable". The Department generally takes the view, for income tax purposes, that any allowance that is intended or designed to cover the employee's out-of-pocket costs to use the vehicle in the course of performing the duties of employment would be a reasonable allowance.

In the context of motor vehicle allowances described in subparagraphs 6(1)(b)(v), (vi) or (vii.1) of the Act, there are additional reasonableness criteria that must be met before such an allowance can be considered reasonable. Subparagraphs 6(1)(b)(x) and (xi) of the Act impose a further qualification by deeming not to be reasonable, any allowance that is not based exclusively on a per kilometre basis for the employment-related use of the vehicle or any allowance that is provided in conjunction with a reimbursement in respect of the employment-related use of the vehicle (other than the reimbursement of supplementary business insurance and toll/ferry charges not already included in those allowances).

In various press releases announcing the annual deduction limits and benefit rates for automobile expenses, the latest being issued on December 16, 1998, the Department of Finance has described the application of the deduction limit under paragraph 18(1)(r) as follows:

"The limit provides a system that is simple to administer for both businesses and employees by allowing businesses to deduct 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 employers can pay to employees using personal vehicles for business purposes. However, for employers to deduct higher rates, the reimbursement must be judged reasonable by Revenue Canada and be included in the employee's income. In such circumstances, employees fulfilling certain conditions ...could then claim the actual automobile expenses they incur."

In accordance with the above press release, the per-kilometer allowances paid by the XXXXXXXXXX employers to the XXXXXXXXXX were judged to be reasonable by the Department and was included on the employees' T4 supplementaries. Accordingly, the employers would not be limited by paragraph 18(1)(r) of the Act, and would be entitled to deduct the amounts paid. The XXXXXXXXXX should include the allowances in their incomes, but they would be entitled to deduct reasonable expenses incurred to operate the vehicle in the performance of their duties.

Discussions with the Department of Finance has clarified that the words "the reimbursement must be judged reasonable by Revenue Canada" in the press releases refers to the deduction by the employer. Revenue Canada must judge that the amount of the deduction is reasonable so that a reimbursement of, say, $5.00 per kilometer, could not be deducted under paragraph 18(1)(r) simply because it was included in the employees' income. We understand that future press releases to be issued by Finance on this issue will likely be more specific.

In our view, any amount paid as an automobile allowance which is included in the income of an employee, cannot be a reasonable allowance for purposes of subparagraph 6(1)(b)(vii.1) because, if it were a reasonable allowance, subparagraph 6(1)(b)(vii.1) would exclude it from income. It may be an amount that is deemed not to be reasonable by virtue of subparagraphs 6(1)(b)(x) or (xi); or it may simply be an amount that is an unreasonable allowance although it is a reasonable reimbursement for purposes of paragraph 18(1)(r).

R. Albert, C.A.

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch