Principal Issues: Various questions on reasonable allowances based on number of kilometers and operating expenses of an automobile
Position: See document
Reasons: See document
CPA QUÉBEC SYMPOSIUM - TAXATION OF INDIVIDUALS -
2 FEBRUARY 2017
QUESTION 1.5
REASONABLE KILOMETRIC ALLOCATION AND OPERATING EXPENSES OF A MOTOR VEHICLE
REASONABLE KILOMETRE ALLOWANCE
Legislation provides that to be reasonable, an allowance paid to an employee must be based solely on kilometers traveled in the course of employment, and the employee mustl not be reimbursed for expenses incurred in excess of the allowance.
The CRA has already pronounced repeatedly on the reasonableness of an automobile allowance. In Technical Interpretation 2012-0454131C6, the CRA stated that the amounts that the Treasury Board of Canada Secretariat (TBCS) determines as a travel allowance are reasonable amounts for the purposes of paragraph 6(1)(b) of the Income Tax Act (the "Act”). As of J3. for an employee traveling in Québec.
In addition, in various technical interpretations, including Interpretation 2012-0463581E5, the CRA has indicated that it generally considers the rates set out in section 7306 of the Income Tax Regulations ("ITR") to be reasonable for the purpose of computing an allowance for the use of a motor vehicle under paragraph 6(1)(b). For 2016, this rate is $0.54 per km for the first 5,000 km and $0.48 per km for the excess.
Finally, in Technical Interpretation 2010-0362781E5, the CRA clarified that an allowance that covers an employee's out-of-pocket expenses would generally be considered a reasonable allowance, if this amount differs from the rates set out in ITR section 7306.
QUESTIONS FOR CRA:
A. Can an employer pay an allowance to an employee using the most favorable of the three methods referred to above (i.e., having the highest amount), while maintaining the reasonableness of the allowance?
B. Do the same principles apply to an electric car?
OPERATING EXPENSES
Computation methods are provided in the Income Tax Act to establish the amount of a taxable benefit where a vehicle is provided to an employee by the employer, which assumes the related operating expenses. There are two components, namely the standby charge benefit (footnote 1) and the automobile operating expense benefit (footnote 2). In particular, the base computation of the operating expense benefit is $0.26 (footnote 3) per km traveled for personal use, where the employer assumes the operating expenses.
QUESTIONS FOR CRA:
C. Does the rate of $0.26 per km, provided for 2016, also apply to electric cars?
D. In the event that the employee personally assumes 100 per cent of the operating expenses related to the automobile provided by the employer, would an allowance paid by the employer of $0.26 per kilometer traveled for business purposes be considered reasonable by the CRA? This is in fact the same rate as would be applicable to the computation of the taxable benefit relating to operating expenses if the employer paid them.
CRA response—reasonable per-kilometre allowance
A. In general, any amount received as an allowance for travel expenses or for the use of a motor vehicle must be included in the income of an employee for a taxation year by virtue of paragraph 6(1)(b) unless it is included in the listed exceptions, including subparagraphs 6(1)(b)(v) and (vii.1). For these two exceptions to apply, the allowance must, among other things, be reasonable. The Income Tax Act does not specify what constitutes a "reasonable allowance" for the purposes of section 6. The question of whether an allowance is reasonable is a factual one which can only be resolved after an analysis of all the relevant facts of each situation.
In brief, the CRA's long-standing position (footnote 4) is that an allowance calculated at a rate per kilometer is considered reasonable if all of the following apply:
- the allowance is computed only according to the number of kilometers traveled for business purposes in the year;
- the rate per kilometer is reasonable;
- the employer has not reimbursed the employee for expenses related to use of the vehicle.
The CRA is of the view that a per-kilometer rate is reasonable if it is to cover expenses incurred by an employee for the use of a motor vehicle in the performance of the employment duties. For example, to establish that a per-kilometer rate is reasonable, the following could be taken into account: the type of vehicle, the road conditions, and the cost of gasoline or the electricity rate at the specific venue.
In addition, an allowance that is too high or too high in relation to expenses that an employee is expected to incur in a specific situation, is unreasonable.
Generally, the CRA considers a rate based on kilometerage to be reasonable if it corresponds to the rate prescribed under ITR section 7306 (Footnote 5). This administrative position applies where an employee pays all expenses related to the motor vehicle. However, a rate different from that prescribed may be considered reasonable in light of the particular facts of a situation.
Thus, the employer and the employee must retain supporting documentation or other acceptable evidence that can be used to establish that the amount of the per-kilometre allowance is reasonable in the circumstances.
B. To date, the CRA does not have a specific policy on per-kilometre allowances for an electric motor vehicle.
CRA RESPONSE - OPERATING EXPENSES:
C. Paragraph 6(1)(k) and section 7305.1 ITR do not include specific rules for electric cars. If the electric car is an "automobile" within the meaning of subsection 248(1), the amount of the benefit relating to the operation of that automobile will be determined under paragraph 6(1)(k) and 7305.1 ITR, if applicable. Thus, the computation is the same regardless of the source of energy that powers the motor of the automobile.
D. The answer to this question is the same as that for question A. The CRA cannot confirm in a request for a technical interpretation whether a rate of $0.26 per kilometer traveled for business purposes would be reasonable.
Isabelle Brulotte
(613) 670-9028
2016-067480
February 2, 2017
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Paragraph 6(1)(e).
2 Paragraph 6(1)(k) .
3 Amount established under section 7305.1 ITR
4 CANADA REVENUE AGENCY, T4130 - Employers' Guide - Taxable Benefits and Allowances, 2016, Chapter 2, under Automobile and motor vehicle allowances.
5 CANADA REVENUE AGENCY, Income Tax Folio- S2-F3-C2, Benefits and Allowances Received from Employment, July 6 2016 version, paragraph 2.67.