Principal Issues: Whether a reimbursement of an employee's supplementary business insurance (SBI) will render the payment of a motor vehicle allowance unreasonable for the purposes of subparagraph 6(1)(b)(vii.1) of the Act and cause the allowance to be a taxable benefit for the employee recipient.
Position: No
Reasons: The reimbursement of an employee's SBI insurance premium would not, in and by itself, cause a motor vehicle allowance to be unreasonable.
XXXXXXXXXX Tim Fitzgerald, CGA 2006-017234 June 29, 2006
Dear XXXXXXXXXX:
Re: Motor Vehicle Allowance and Reimbursement of Supplementary Business Insurance
Further to our telephone conversation of June 22, 2006, we are responding to your letter of February 1, 2006, wherein you requested our views regarding the tax treatment of a motor vehicle allowance and reimbursement of supplementary business insurance ("SBI").
You described a situation where the employer, the XXXXXXXXXX (the "City"), pays its unionized and non-unionized employees a motor vehicle allowance (the "allowance") at the rate of $XXXXXXXXXX per kilometre when the employees make authorized use of their personal vehicle while travelling in the course of performing their duties of employment. The allowance is based solely on the number of kilometres driven by an employee and will remain at $XXXXXXXXXX per kilometre regardless of the total kilometres travelled by the employee in the year. The City requires that employees maintain at least $XXXXXXXXXX of public liability and property damage insurance coverage. Upon presentation of a proof of payment of the insurance premium, the City will reimburse an employee for the portion of the insurance premium relating to SBI coverage.
You have asked whether the City's payment to reimburse an employee for his or her SBI coverage would, by virtue of subparagraph 6(1)(b)(xi), render the allowance unreasonable for the purposes of subparagraph 6(1)(b)(vii.1) of the Income Tax Act (the "Act") and thereby cause the allowance to be a taxable benefit for the employee recipient.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following general comments.
Generally, a reasonable motor vehicle allowance received by an employee in the year for travelling in the course of performing the duties of employment is excluded from employment income by virtue of one of subparagraphs 6(1)(b)(v), (vi) or (vii.1) of the Act. An allowance will be considered reasonable if the rate is designed to cover an employee's out-of-pocket costs to use the motor vehicle in the course of performing duties of employment. An allowance is deemed not to be reasonable by virtue of subparagraph 6(1)(b)(x) if it is not based solely on the number of kilometres for which the automobile is used in connection with or in the course of performing the duties of employment. Further, an allowance is also deemed not to be reasonable by virtue of subparagraph 6(1)(b)(xi) of the Act if the employee receives both an allowance in respect of the use of the automobile and is reimbursed in whole or in part for expenses in respect of that use (except where the reimbursement is in respect of supplementary business insurance or toll or ferry charges and the amount of the allowance was determined without reference to those reimbursed expenses).
It is our view that a reimbursement of the portion on an insurance premium for SBI coverage would not, in and by itself, cause a motor vehicle allowance to be unreasonable. We trust our general comments are of assistance.
Yours truly,
Randy Hewlett
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch