Principal Issues: [TaxInterpretations translation] If there is a blended allowance, what amount, if any, do employees have to include in their income calculation? In this case, does the employer have to complete Form T2200?
Position: (1) We consider that employees receive two separate allowances and that the allowance calculated on the basis of a rate of $0.08/km should be included in their income.
(2) Yes.
Reasons: (1) The two allowances are not for the same use since the one based on the rate of $0.08/km is not based on the use of the motor vehicle.
(2) A T2200 shall be completed for any employee wishing to deduct motor vehicle expenses incurred in the performance of employment-related duties.
XXXXXXXXXX 2009-031254
July 20, 2009
Dear Madam,
Subject: Motor Vehicle Allowances
This is further to your letter of March 5, 2009 requesting the opinion of the Income Tax Rulings Directorate of the Canada Revenue Agency ("CRA") on the requirement to file Form T2200 for employees who are required to use their vehicle for work purposes.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you described a situation where the Ministry of Health and Social Services of Quebec (the "employer") requires its nurses (the "employees") to have a motor vehicle at their disposal in order to perform the duties related to their office or employment.
For the first 8,000 km travelled by in a year, the employer pays its employees an allowance of 0.40$/km, while for any excess kilometres, the employer pays an allowance at the rate of 0.325$/km. However, where the kilometres are lower than 8,000 km, the collective agreement between the employer and the employees provides that the employees will receive an allowance of $0.40/km for the kilometres travelled as well as an allowance of $0.08/km for the difference between the kilometres travelled and the 8,000 km threshold.
For employees who travel less than 8,000 km per year in the performance of their employment duties, you wish to know if the employer must complete Form T2200. You also wish to know if the amounts these employees receive (those who travel less than 8,000 km) are taxable under the Act.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of the Canada Revenue Agency not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
For the purposes of paragraph 6(1)(b), an allowance that covers the actual expenses incurred by an employee who uses the employee’s motor vehicle in the course of employment would generally be considered a reasonable allowance. While this determination is a factual one, as a general rule, an employer may use the prescribed rates in section 7306 of the Income Tax Regulations. Depending on the particular circumstances of each case, a rate that differs from that section could also be considered reasonable. With respect to motor vehicle expenses incurred by an employee in the performance of the duties of the employee’s office or employment, paragraph 8(1)(h.1) generally provides a deduction for such expenses unless the employee has received a motor vehicle expense allowance, which because of paragraph 6(1)(b) is not included in computing the employee's income for the year. For the purposes of subparagraphs 6(1)(b)(v), (vi) and (vii.1), an allowance shall be deemed not to be reasonable where the use of the vehicle is not, for the purpose of determining the allowance, based solely by the number of kilometres for which the vehicle is used in connection with or in the course of the office or employment.
In this case, with respect to employees who travel less than 8,000 km in the performance of duties related to their office or employment, we are of the view that the allowance calculated on the basis of a rate of $0.40/km is reasonable. However, the portion of the allowance calculated on the basis of a rate of $0.08/km would be deemed not to be reasonable since it would not be calculated on the basis of the kilometres travelled by the employee in the performance of the duties of the employee’s office or employment.
In response to your question as to whether the part of the allowance that is not considered reasonable - that calculated at a rate of $0.08/km - results in both parts of the allowance not being considered reasonable, it is necessary to determine whether both parts of the allowance are for the same use of the vehicle. In this regard, we refer you to the publication T4130, Employers' Guide, Taxable Benefits and Allowances, which states that when an employer pays an allowance that is a combination of flat-rate and reasonable per-kilometre allowances that cover the same use for the vehicle, the total combined allowance is a taxable benefit and has to be included in the employee's income.
We believe that the comments regarding blended allowances - as outlined in the Employer's Guide - may be applicable in this case since part of the allowance paid to employees is based on a per kilometre rate that is considered reasonable while the other part of the allowance is not related to the use of the motor vehicle.
In response to the question of whether both parts of the allowances received by employees are for the same use of the motor vehicle, it is necessary to examine the nature of each allowance and the conditions that must be met in order for each allowance to be paid. On the one hand, the allowance calculated at a rate of $0.40/km is based on the distance travelled by an employee in the performance of the employee’s duties while the allowance calculated at a rate of $0.08/km is paid as long as the distance travelled in a year is less than 8,000 km.
In the situation you have described, we are of the view that there are two allowances. The first, calculated at a rate of $0.40/km, would not be included in the income of the employees receiving it, while the second, calculated at a rate of $0.08/km, would be included in the income of the employees receiving it.
Motor vehicle expenses incurred by an employee in the performance of employment duties may be deducted in computing employment income under paragraph 8(1)(h.1). Where an employee receives an allowance for the use of a motor vehicle in a taxation year that is not, because of paragraph 6(1)(b), included in computing the employee's income for the year, no deduction is permitted under paragraph 8(1)(h.1). However, if the employee can demonstrate that the motor vehicle expenses incurred in performing the employment duties exceed the amount of any allowance received and that the allowance is fully included in computing the employee's income (including any portion that may not be taxable because of paragraph 6(1)(b) and any amount for reimbursement of commercial automobile insurance), the CRA will generally allow the deductibility of all motor vehicle expenses incurred in performing the employment duties.
In such circumstances, the employer will have to complete Form T2200 to allow employees to deduct their motor vehicle expenses.
We hope that the comments are of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.