7 February 1991 Income Tax Severed Letter - Automobile Allowances

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.

Dear Sirs:

Re: Automobile Allowances

We are responding to your letter of November 23, 1990 in which you asked how the Department will interpret and administer the proposed technical amendments to paragraphs 6(1)(b), 8(1)(h) and 8(1)(h.1) of theIncome Tax Act(the “Act”).

The proposed technical amendment to both paragraphs 6(1)(b)(vii) and (vii.1) of the Act involves the replacement of the phrase “not in excess of reasonable” with the word “reasonable”. As a consequence, if the proposed change becomes law, employees who receive a less-than-reasonable allowance will be required to include the amount of the allowance in income. You have asked whether the determination as to the reasonableness of an allowance is made by the employer or the employee. Can an allowance that is considered reasonable by the employer be later determined to be less than reasonable by the employee and be included in income? This leads to the further question as to whether interest and/or penalties would be levied against employers for failure to withhold, as required by paragraph 153(1)(a) of the Act, from an allowance that is eventually included in income.

It is the Department's view that the question of the reasonableness of an allowance must be dealt with on a case by case basis, taking into consideration each employee's circumstances. Accordingly, we will accept the view that an employee's allowance is not “reasonable” where the employee's total expenses for business use in the year exceed the total allowances received in the year. Under the proposed change to subparagraph 6(1)(b)(vii.1), such cases will result in the employee being entitled to include the allowance in income and claim the related business expenses to the extent that they are reasonable.

With respect to the employer's responsibility under paragraph 153(1)(a) of the Act, it is the Department's position that if an employer provides an automobile allowance computed on a reasonable basis (i.e., using an appropriate per-kilometre rate applied to all business kilometres driven by the employee), that is not otherwise “deemed” an unreasonable allowance [subparagraphs 6(1)(b)(x) & (xi)], then deductions at source from the allowance would not be required. However, the onus would be on the employer to show, if necessary, that the allowance is computed on a reasonable basis.

Your second inquiry deals with the situation where the employee is in receipt of both a per-kilometre allowance (non-taxable) for out-of-town travel and a flat rate allowance (taxable) for in- town travel. You ask whether receipt of the non-taxable allowance precludes the employee from claiming expenses related to the taxable allowance (included in income). You make reference to the proposed new paragraph 8(1)(h.1). From a technical standpoint, the wording of the new provision clearly precludes an employee who is in receipt of an allowance that is not included in income by virtue of subparagraph 6(1)(b)(vii.1) from making a claim under the new provision. A similar technical interpretation is put forth in connection with the existing paragraph 8(1)(h) where a claim for travelling expenses other than automobile expenses could be denied if the taxpayer is in receipt of a non-taxable automobile allowance.

The Department has adopted, however, an administrative position which permits the expenses to be claimed on the condition that all automobile allowances received are included in income. Such an administrative policy is in place in connection with expense claims to which paragraph 8(1)(h) presently applies.

Finally you ask whether the positions outlined above would vary if the “allowance” were to be paid through the payroll, by means of an expense report or through petty cash reimbursement. As described in Interpretation Bulletin IT-522 “Vehicle and Other Travelling Expenses—Employees”, an allowance is considered to be a payment that an employee receives, however computed, without having to account for its use. Whether the methods of payment described in your letter constitute the provision of an allowance is a question of fact. Payments made to an employee, upon presentation of actual receipts, as a reimbursement of business expenses incurred for which the employee is accountable, would not be considered an allowance to which our previous comments apply. “Reimbursements” and “accountable advances” are further discussed in paragraphs 53 and 54 of the Interpretation bulletin.

We hope that our comments will assist in clarifying the subject for you.