Principal Issues: [TaxInterpretations translation] A single payment covering both kilometres driven by the employee for employment purposes and kilometres driven for other purposes is paid by the employer as an allowance. For the purposes of paragraph 6(1)(b), is it one allowance or two separate allowances that are not for the same use of the automobile?
Position: There is only one allowance that is deemed not to be reasonable.
Reasons: Wording of subparagraph 6(1)(b)(x)
2006-018530 XXXXXXXXXX Anne Dagenais, Advocate (613) 957-2121 December 4, 2006
Dear Sir,
Subject: Request for Technical Interpretation -- Application of paragraph 6(1)(b) - vehicle allowance
This is in response to your letter of May 8, 2006, in which you asked for our opinion on the above subject. We apologize for the delay in responding to your question.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Facts
(1) An employee receives payments from an employer in the form of allowances for the kilometerage driven in the employee’s automobile during the year.
(2) The employee has used the employee’s motor vehicle both in the performance of the duties of employment and for other purposes.
(3) The allowances are only calculated at a predetermined and reasonable rate on the basis of the actual kilometres driven by the employee in the employee’s automobile during the year. The employer keeps a register for this purpose. The record kept by the employer does not specify the number of kilometres driven in the course of the employee's employment and those driven for other purposes.
(4) The rate per kilometre is considered reasonable, as it corresponds to the rate prescribed by the Canada Revenue Agency (the "CRA").
(5) When paying allowances, the employer makes a single payment covering both the kilometres driven by the employee's automobile in the course of the employee's employment duties and the kilometres driven for other purposes.
Your Opinion
You consider that we are dealing with two separate allowances, which are not aimed at the same use of the vehicle, for the following reasons:
(1) There is use by an employee of the employee’s automobile in the course of or in connection with the performance of the duties of employment and use by the employee of the automobile for other purposes.
(2) Each kilometre driven by the vehicle has either been driven by the employee in the performance of the employee's employment duties or has been driven for other purposes.
(3) You are of the view that the fact that only one payment is made by the employer, covering the mileage driven by the employee in the course of the two separate uses of the vehicle, does not, in itself, have any impact on the separate nature of the two allowances, even though the employer's records do not distinguish between the mileage driven by the employee in the course of employment and the mileage driven for other purposes. Indeed, since the allowance is calculated on the basis of a reasonable per-kilometre rate only, the amount received by the employee covering the actual kilometres driven in the course of employment is necessarily a reasonable allowance received for that purpose, which is distinct from the use of the automobile received for other purposes.
(4) You are of the opinion that if it were necessary to adjust downwards the number of kilometres travelled by the employee in the course of employment after the payment of the allowances, the employee could not be considered to have received an unreasonable allowance for the use of vehicle in the course of employment, since the allowance received for this purpose would be automatically adjusted, given that it is calculated solely on the basis of a predetermined and reasonable rate per kilometre. In other words, if it is necessary to adjust the allocation of the number of kilometres driven between the two uses of the vehicle, it is also necessary to adjust the allocation of the amount of allowance received for each of these two distinct purposes, since the basis of calculation is a predetermined and reasonable rate per kilometre. This inevitably leads to a reasonable allowance being received for mileage driven in the course of employment and a taxable allowance for mileage driven for other purposes.
(5) In your opinion, this is not a payment of a so-called "mixed" allowance either. In your view, in order for there to be a mixed allowance, the employee must, in addition to receiving an allowance based on a rate per kilometre, receive other compensation for the same use of the employee’s vehicle, which is not the case in the hypothetical situation set out in this case.
Questions
(1) For the purposes of paragraph 6(1)(b), did the employee receive a single allowance or two separate allowances that do not relate to the same use of the automobile, namely, an allowance for kilometres driven during the year in the course of the employee's employment and an allowance for kilometres driven for other purposes.
(2) If we conclude that there are two separate allowances for different uses of the same vehicle, you wish to know our opinion on the tax treatment of each of the two allowances for both the employee and the employer.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of our Directorate not to issue written opinions on proposed transactions otherwise than by way of advance 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 which may not apply in full to the situation you have submitted to us.
For the purposes of sections 6(1)(b)(v), (vi) and (vii.1), subparagraphs (x) and (xi) provide that:
"an allowance received in a taxation year by a taxpayer for the use of a motor vehicle in connection with or in the course of the taxpayer’s office or employment shall be deemed not to be a reasonable allowance
(x) where the measurement of the use of the vehicle for the purpose of the allowance is not based solely on the number of kilometres for which the vehicle is used in connection with or in the course of the office or employment, or
(xi) where the taxpayer both receives an allowance in respect of that use 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);”
Furthermore, in order for an employee to claim the travel allowance as non-taxable, not only must the requirements of subparagraphs 6(1)(b)(x) and (xi) be satisfied, but also the allowance must be reasonable and must be received from the employer "for travelling in the performance of the duties of the office or employment", as provided for in, inter alia, subparagraph 6(1)b)(vii.1).
In the case you presented to us, your conclusion is not in accordance with the Act. In our view, in determining the reasonableness of a travel allowance, the phrase "solely on the number of kilometres for which the vehicle is used in connection with or in the course of the office or employment” (emphasis added) in subparagraph 6(1)(b)(x) refers to the use of the vehicle for business purposes only. Given the term "solely" used in the Act, an allowance is not deemed reasonable if it is attributable to use of the vehicle for other purposes. Furthermore, in our view, it is not possible to conclude that there are two separate allowances. Consequently, in the situation you have presented to us, the allowance received by the employees is deemed not to be reasonable because of the application of subparagraph 6(1)(b)(x).
In this situation, it is not necessary to continue the analysis under the other conditions listed, inter alia, in section 6(1)(b)(vii.1) since the requirements of section 6(1)(b)(x) are not satisfied.
Furthermore, we are of the view that this is not a "mixed allowance". To be a "mixed allowance", one part of the allowance must be a fixed amount and another part must be calculated according to a reasonable rate per kilometre. The total of the mixed allowance is taxable when both parts of the allowance are for the same use of a vehicle. In this context, since we are not dealing with a "mixed allowance", there is no need to further clarify the meaning of that term.
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
We hope you find these comments of assistance. Should you require any additional information regarding the content of this document, please do not hesitate to contact us.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate