26 May 1989 Income Tax Severed Letter 5-7327 - [890526]

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.

J.A. Szeszycki

(613) 957-2130

MAY 26 1989

Dear Sir:

I am responding to your letter of January 16, 1989 as well as your letter of January 17, 1989 to Mr. Don Joy. The letter to Mr. Joy summarized your understanding of various issues discussed at the meeting held January 4th, here in Ottawa. At that meeting three other issues were raised but it was agreed that they should more appropriately be submitted to this office for consideration. The delay encountered in providing a response is regretted.

Before addressing those three issues we would first like to provide comments and some clarification of the several points discussed at the meeting and summarized in your January 17 letter, comments which we feel are necessary in order to ensure a clear understanding of the Department's views on the subject.

We will provide our comments in the order in which the items have been raised.

The first of the issues discussed was that which was presented in your letter by way of background, i.e., the issue of what is an allowance versus a reimbursement. It is your contention that an amount paid at a fixed per kilometre rate should not be considered an allowance but rather as a reimbursement of expenses incurred. In support of your view you have referred to the recent Tax Court of Canada judgement (November 9, 1988) in AA and CC Yorke v. MNR ("Yorke"). The Department, however, maintains the view that a reimbursement is a transaction in which an individual is refunded an amount, in respect of an expense actually incurred by him, upon presentation of an acceptable receipt. Any amount paid in respect of expenses expected or presumed to have been incurred, where the amount is based on an estimate or projection of what the actual costs may be but where the recipient is not accountable to the payor as to the actual costs incurred, is considered to be an allowance, regardless of how that amount is computed.

Although the statements made by Judge J.C. Couture in handing down the judgement in the Yorke case would appear to support your contention, the Department is not in agreement with his interpretation of the "allowance test" as set out in The Queen v. Pascoe 75 DTC 5427 as modified by the Supreme Court of Canada in Gagnon vs the Queen 86 DTC 6179. However, since this particular aspect of the judgement had no "bottom-line" effect on the assessment of the taxpayers involved, the Department has declined to pursue the matter, but, it is not prepared to accept the case as having a significant impact on its views of the issues raised. We would further note that the language used in drafting the amendments to paragraph 6(1)(b) of the Income Tax Act ("Act") particularly in its reference to an "allowance ..... based .....on the number of kilometres...", reflects the general perception that a distance-based allowance is not to .be considered a reimbursement that can be excluded from income.

Under Item #1 of your letter you have set out your understanding of the tax consequences that result where an employer reimburses the employee for certain of the automobile expenses incurred. More specifically it is your understanding that:

- subparagraph 6(1)(b)(xi) of the Act deals with situations where there is both a per-kilometre allowance and a reimbursement.

- subparagraph 6(1)(b)(xi) supports the view that a reimbursement of all or a portion of specific automobile expenses would not be considered an allowance under paragraph 6(1)(b) of the Act.

- a reimbursement of the portion of specific automobile expenses that relate to the business use of the automobile would not be regarded as a benefit from employment.

- a reimbursement could include an employee's lease cost, insurance, licensing, repairs maintenance, gas and oil, and that a portion of such costs that are reimbursed could be determining in part on a time basis, and in part on a use basis without disqualifying the payment as a reimbursement.

- The limitation (under section 67.3 of the Act) on the deductibility of the lease cost of an automobile would not apply to a reimbursement to the employee by the employer in respect of the cost.

- The employer would not be subject to any disallowance under paragraph 18(1)(r) of the Act in respect of any reimbursement made since a reimbursement is not an allowance.

We are in agreement with each of the statements made, as set out above, but only in the context of reimbursements as that term is interpreted by the Department. As to the concept of a reimbursement in respect of the depreciation of a vehicle used for business purposes, we must confirm that, in our view, a payment in respect of a notional expense such as depreciation or capital cost allowance would not be considered reimbursement, in light of our earlier comments concerning the nature of a reimbursement

Under Item #2, the statement concerning the options available to an employee in receipt of an allowance described in subparagraph 6(1)(b)(v) of the Act (that is, that where an allowance is treated as an exempt allowance by virtue of this subparagraph an employee has the option of adding the allowance into income and claiming the appropriate expenses) is incorrect. Paragraph 6(1)(b) of the Act does not provide for any optional treatment of allowances received. It requires the allowance to be included in income unless its exclusion is specifically provided for in subsequent subparagraphs. Subparagraph (v) (subject to new subparagraphs (z) and (xi)) specifically excludes a reasonable allowance for travelling expenses received by an employee described therein. Therefore, an allowance that is not considered reasonable or that is deemed to be in excess of reasonable must continue to be included in the employee's income.

Under Item #3, it is your understanding that an employee in receipt of an allowance described in subparagraph 6(1)(b)(vii.1) of the Act, that is not in excess of a reasonable amount, is not entitled to include the allowance in income and claim appropriate expenses. However, if an employer, in addition to the allowance, reimbursed the employee with respect to a cost incurred in connection with the income earning use of the automobile, the allowance. would be deemed to be in excess of a reasonable amount (by virtue of subparagraph 6(1)(b)(xi)) and would be required to be included in income with the employee being entitled to claim appropriate expenses. On the assumption that the expenses referred to otherwise qualify under paragraphs 8(1)(f) or (h) of the Act, we agree with your understanding of the provisions and the Department's position in that regard.

Under Item #4 you describe the situation where a per-kilometre allowance is paid to an employee throughout the year and, on the understanding that the allowance would be exempt from inclusion in income, no withholding is made with respect to CPP, UIC and income tax; however, at the end of the year the employer reimbursed the employee for a certain expense thereby invoking the deeming provision of subparagraph 6(1)(b)(xi) of the Act. We confirmed that such an eventuality would not necessarily trigger the imposition of penalties associated with the failure to withhold as long as the appropriate amounts are forwarded with the next scheduled remittance. Such is the Department's administrative practice, which recognizes that the failure to withhold was not intended as a contravention of the Act. The Department, however, reserves the right to assess the penalty where it feels that there has been an abuse of the spirit and intent of the law.

Under Item #5, we confirm your understanding that the use of the 27c/21c per-kilometre as an approximation of a reasonable allowance would not normally be challenged unless the Department, in a specific fact situation, had reason to believe that the rate did not reasonably reflect the costs of owning and operating the employee's automobile.

Under Item #6, you discuss The Department's position with respect to advances to an employee against a tax exempt allowance. It-is your understanding of that position that such advances may be made provided there is an accounting for those advances at year-end whereby any excess advance would have to be refunded to the employer and any shortfall would be paid to the employee. You have also noted the Department's concern that advances may be used to provide an employee with a short term interest-free loan and that it will, depending on the circumstances of a particular case, consider the application of subsection 80.4(1) to impute a benefit to the employee. We confirm your understanding of the Department's position with respect to both of the above points.

The three positions put forth in your January 16th letter can be summarized as follows.

1. The amount computed under paragraph 6(1)(a) of the Act as a benefit in relation to the operation of the automobile should be limited to the aggregate of costs associated with moving the automobile from point A to point B.

2. The relevant provincial sales tax paid to the automobile dealer/lessor by the purchaser/lessee should not be treated as part of the cost of the automobile for the purposes of the standby charge calculation under subsection 6(2) of the Act.

3. For the purposes of the computation of the standby charge the "total available days" should be reduced by any day throughout which the employee, or any person related to the employee, does not have access to the automobile.

Operating Costs

Employee benefits, of any kind whatever, are taxable under the provisions of paragraph b(l)(a) of the Act except as specifically excluded under subparagraphs (i) to (iii) of that paragraph. Employee benefits include those in relation to the use of an automobile; however, subparagraph (iii) specifically excludes that benefit from inclusion under paragraph 6(1)(a) except to the extent that the benefit relates to the operation of the automobile. The structure of subparagraph (iii) requires that in determining the amount of the benefit that can be excluded from treatment under this paragraph the exception, i.e. the amount in relation to the operation of the automobile must first be determined. The portion excluded is covered as an "availability" benefit under the standby charge provisions of paragraph 6(1)(e).

The objective of the standby charge provision is to assess the benefit associated with the provision of an automobile to the employee relieving him of the necessity of providing one for himself. Thus, the standby charge is intended to cover the benefit associated with the acquisition of the automobile the coat of which has been absorbed by the employer.

The Department, in describing the benefit in relation to the operation of the automobile in IT-63R2 uses the phrase "operating costs". Those words were chosen because they briefly describe the expenses incurred in operating the automobile and, for greater certainty as to what those words represented, the specific expenses were itemised. Contrary to what was stated in your submission, the Department's position as to what is encompassed by the phrase "operating costs" is not based upon the case of O'Reilly v. Canadian Accident and Fire, Insurance Company [(1929) 2 DLR Ont]. Jurisprudence does, however, provide support for the general interpretation given to the phrase "operating costs" or "operating expenses". For example, in the case of Ain v. MNR 86 DTC 1495 Brulfi, T.C.J. made reference, in his analysis of automobile expenses on p. 1497, to an allowance as covering all the operating expenses and then went on to discuss the capital cost allowance and the interest on the purchase loan., In the case of Gauvin v. MNR 79 DTC b96 Member Taylor made reference towards the end of his findings on p. 699 to "operating costs" which term referred back to the expense items listed in the argument set out on p. 697. Further, in discussing automobile operating costs in Price v. MNK 80 DTC 1311 Mr. Taylor wrote "... I do not agree with counsel for the respondent that only costs incurred while the automobile is in motion are qualified for deduction as travelling expenses.... This view could even eliminate such things as repairs, license and insurance", a clear indication that limiting operating costs to costs incurred putting the automobile in motion vas not the intent of the legislation in any context. In contrast, no jurisprudence was found that would support the more restrictive view.

As a further indication as to what the term "operating costs" is generally taken to include, we refer to the Report on the White Paper on Tax Reform (Stage 1) dated November, 1987 and its discussion on automobile expenses on page 58 where the term "operating costs" is used and is clearly intended to include insurance, licensing, parking, fuel, maintenance and repairs. During the course of the Commons debate on Bill C-139 (Commons Debates March 10, 1983 p. 23670) the Government was specifically asked to define operating costs to which the response was: "... this includes gasoline, repairs, insurance and other charges that would be applied against the vehicle to keep it on the road."

The Department, therefore, maintains the position that the benefit in relation to the operation of an automobile includes amounts in respect of insurance, license and repairs and only excludes those relating to the acquisition or purchase of the automobile.

Within the contents of Mr. Mogan's 1983 opinion on the subject the comparison is drawn between a senior executive who travels relatively few kilometres and therefore suffers much less wear and tear (and expense) on the automobile, and a salesman who travels extensively on business and as a result incurs more frequent, costly repairs. The observation was made that it was surely not the intent of the legislation that the employee salesman be taxed on the larger resulting benefit. The intent of the legislation is to bring into the income of the employee the value of the benefit derived when the employer covers what would otherwise be a personal expense of the employee. If, as in the example cited, all of the distance travelled by the employee salesman was in the course of the employer's business then there would be no benefit imputed under paragraph 6(1)(a) in respect of the operation of the automobile. Conversely, the executive who does not travel any distance in the course of his employer's business would be assessed a benefit with respect to any employer paid repairs regardless of how minor they may be.

Provincial Sales Tax

In, your submission you have set out your view that the provincial sales tax levied in respect of the purchase price of the vehicle is a cost that is distinct from the actual capital cost of the asset to the purchaser. You base your conclusion on the premise that the tax is not a charge levied by the vendor but by the provincial authority using the vendor as agent. The Department holds the view that the cost to the employer of an automobile is generally the acquisition cost recognized on the books of the employer using generally accepted accounting principles. One of those principles requires that, among other things, the recognized acquisition cost includes any relevant sales taxes.

Available Days

As indicated earlier, the objective of the standby charge provision is to assess the benefit associated with the provision of an automobile to an employee relieving him of the necessity of providing one for himself. Paragraph b(l)(e) of the Act provides for the inclusion in the income of an employee of a reasonable standby charge where the employer (or a person related to the employer) has made an automobile available to that employee, or a related person. The computation of the standby charge is based on the total number of days that the automobile was made so available. It is the Department's view that once an employer-owned automobile has been assigned to an employee for his use that automobile is considered to have been made available to him until such time as the vehicle, and control over its use, are required to be returned to the employer. During those periods in the year in which the employee has put himself in the position of not having immediate access to the vehicle he still has control over it; that is, the employer is precluded from making that automobile available to any other employee.

It is hoped that the foregoing has clearly set out the Department's position on the various issues raised in both your letters. It is further hoped that you will undertake to clarify your membership's understanding of the positions taken so that they are better able to comply with the requirements of the law.

Yours truly,

ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR B.W DATH

B.W. Dath Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

cc. D.W. Joy - Current Amendments Division cc. C. Hussey - Examination Division cc. J. Wilson - Source Deduction Division