Principal Issues: Whether an employer can choose to pay an employee a motor vehicle allowance that is less than the rate prescribed in section 7306 of the Income Tax Regulations.
Position: Yes
Reasons: Under the Income Tax Act, a reasonable allowance paid to an employee by an employer for the use of a motor vehicle for travelling in the performance of the duties of the employment will not be required to be included in the income of the employee. An allowance may be considered reasonable even if it is less than the rate prescribed in section 7306 of the Regulations.
XXXXXXXXXX 2006-019392
September 11, 2006
Dear XXXXXXXXXX:
Re: Motor Vehicle Allowance
This is in reply to your letter dated June 22, 2006, requesting our opinion on motor vehicle allowances paid by an employer to its employee for travel in the performance of employment related duties.
You indicated that the allowance is less than the rate prescribed in section 7306 of the Income Tax Regulations (the "Regulations") and inquired if it would be considered reasonable for purposes of determining whether the employee has received a taxable benefit or can claim motor vehicle expenses.
Our Comments
Generally, paragraph 6(1)(b) of the Income Tax Act (the "Act") requires that all amounts received by an employee in the year as an allowance for personal or living expenses or as an allowance for any other purpose be included in computing income for the year. There are a number of exceptions to this general rule. Specifically, subparagraph 6(1)(b)(vii.1) of the Act exempts from income reasonable allowances for the use of a motor vehicle received by most employees who travel for employment purposes.
Whether an allowance is reasonable for purposes of subparagraph 6(1)(b)(vii.1) of the Act is a question of fact. As a general rule, an employer can use the prescribed rates in section 7306 of the Regulations. Other rates can also be considered reasonable depending on the circumstances. We generally take the view that an allowance is reasonable if it covers the out-of-pocket costs incurred by an employee in using a personal motor vehicle while travelling for employment purposes. In terms of the deductibility of motor vehicle expenses incurred while travelling for employment purposes, subparagraph 8(1)(h.1) of the Act will generally provide a deduction for such expenses but not if the employee received a reasonable allowance that is not included in income as a taxable benefit because of paragraph 6(1)(b).
We trust this information is helpful.
Yours truly,
Randy Hewlett
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch