28 June 2011 Internal T.I. 2011-0399691I7 - Automobile Standby Charges - Leased Vehicles

Principal Issues: 1. Is a terminal charge on the disposition of an automobile lease included in the standby charge?
2. Is there an alternate method for calculating the taxable benefit to an employee that excludes a terminal charge

Position: 1. Yes. 2. No.

Reasons: 1. In accordance with subsection 6(2) of the Act, all payments made by an employer to a lessor for the termination of a lease including those arising at the end of a lease are required to be included in the employer's cost of leasing the automobile for that year.
2. The standby charge is computed using the formula provided by subsection 6(2) of the Act. There are no alternate methods available.

XXXXXXXXXX
2011-039969
T. Baltkois

June 28, 2011

Dear XXXXXXXXXX :

Re: Automobile Standby Charges

I am writing in response to your email of March 21, 2011 concerning the computation of automobile standby charges. More specifically, you have enquired whether there is a method of calculating the taxable benefit to an employee that would exclude certain terminal charges.

In the situation you described, an employee was operating a vehicle leased by the employer and while on business travel caused an accident which resulted in the total loss of the vehicle. Under normal circumstances, the collision damage insurance coverage on the vehicle would cover the cost differential between the salvage value of the vehicle and the remaining book value of the lease subject to a deductible. However, because the employer elected to self-insure its leased vehicles for collision damages, there was no insurance coverage against the loss which resulted in a significant payout to the leasing company to terminate the lease, with a corresponding terminal charge being added in computing the standby charge.

Our Comments

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

The value of a benefit derived by an employee from the personal use and availability of an automobile supplied by his or her employer is required to be included in calculating the employee's income under paragraph 6(1)(e), 6(1)(k) or 6(1)(l) the Income Tax Act ("the Act"). The benefit includes a standby charge and an amount for the operating costs related to the employee's personal use of the automobile.

The standby charge included under paragraph 6(1)(e) of the Act is calculated under subsection 6(2) of the Act using a formula that takes into account the "total of all amounts that may reasonably be regarded as having been payable by the employer to a lessor for the purpose of leasing the automobile".

As noted in paragraph 13 of Interpretation Bulletin IT-63R5, Benefits, Including Standby Charge for an Automobile, from the Personal Use of a Motor Vehicle Supplied by an Employer - After 1992, when calculating the standby charge on a leased automobile, a terminal charge at the end of a lease is included in the employer's cost of leasing the automobile for that year. In our view this would include the cost incurred to terminate a lease as a result of an accident. It should be noted that employer cost is but one factor that is taken into account in the standby charge calculation provided by subsection 6(2) of the Act. The impact of a terminal charge on the standby charge could be proportionately lower depending on personal use kilometers.

It should also be noted that, as an alternative to including the terminal charge in the calculation of the standby charge for the taxation year in which it was incurred by the employer, the amount can be included on a prorated basis in the calculation of the standby charge for each taxation year in which the employee enjoyed a benefit in respect of the personal use and availability of the automobile.

For this alternative method to apply the employer would have to amend the T4 or T4A slips for previous taxation years and the employee would have to write to the relevant tax services office or tax centre and request the adjustment. The employee cannot use this alternative method for taxation years that are beyond the normal reassessment period.

For more information, see IT-63R5 and CRA Guide T4130, Taxable Benefits and Allowances.

We trust these comments will be of assistance to you.

Yours truly,

Phyllis Waugh
A/Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch