Principal Issues: Position of CRA regarding a terminal charge in the stand-by calculation.
Position: The terminal charge can be included on a prorated basis in the calculation of the stand-by charge for each taxation year in which the employee enjoyed a benefit in respect of personal use and availability of the automobile.
Reasons: Consistent with previously published views.
Question 14 - Reimbursement of Tax Costs of Excessive Vehicle Standby Charges
Where employees are permitted to use company vehicles for personal use they are subject to a taxable benefit income inclusion with a standby charge calculated under paragraph 6(1)(e) and subsection 6(2) of the Act. The formula for calculating the standby taxable benefit is inflexible, includes the total of all payments made on the lease, and does not differentiate between regular lease amortization payments and a final adjustment payment owing to excessive usage. Hence, in the year a lease is terminated, an employee can incur a disproportionately large taxable benefit wherever the employer is required to reimburse the lessor for the diminution in the vehicle's terminal value below the residual value agreed in the lease (hereinafter referred to as a "terminal charge").
For example, assume a new leased vehicle with a capital cost of $35,000 is disposed of for $15,000 after 18 months of service. The annual personal use by the last individual to use the vehicle was a reasonable 13,000 km; the business use in that year was 60,000 km. The rental cost based on normal amortization was approximately $12,700. Assume that the vehicle is returned to the lessor with 108,000 km of total usage. Because of excessive usage, nearly all of which is business related, the final terminal charge on disposal of the vehicle was an additional $11,400. The employee using the vehicle when it was turned in incurs a taxable benefit based on the $12,700 rental and the extra $11,400 payment (even though the employee did not use the vehicle for the entire term). Under the standby formula, the employee receives a taxable benefit of $10,400. ((Personal kms (or 13,000 kms) ÷ 20,000 kms) x 2/3 x total payments ($12,700 + $11,400)). On these facts, a more reasonable benefit calculation would exclude the terminal charge of $11,400 and produce a taxable benefit of only $5,500. ((13,000 pers kms ÷ 20,000 kms) x 2/3 x $12,700).
Would CRA be prepared to discuss a potential solution to mitigate the standby charge computed under paragraph 6(1)(e) and subsection 6(2) where an excessive taxable benefit results to the employee because of high business usage which resulted in a large terminal charge at then end of a lease? For example, would CRA consider a cash payment from the employer to the employee to be a "reasonable allowance" under subparagraph 6(1)(b)(vii.1) and hence not taxable to the employee?
Response
The CRA has provided an alternative solution to including the terminal charge in the calculation of the standby charge for the taxation year in which the employer incurred it. The terminal charge 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 the purposes of subparagraph 6(1)(b)(vii.1), subparagraph 6(1)(b)(x) of the Act deems an allowance received in a taxation year by an employee for the use of a motor vehicle in connection with, or in the course of, an office or employment not to be a reasonable allowance if it is not calculated solely by reference to the number of kilometres for which the vehicle was so used in the year. Accordingly, cash payments to compensate for a terminal charge, that are not based on the number of kilometres for which a vehicle is used in a year, would not be considered a reasonable vehicle allowance.