Principal Issues: 1- Can the CRA specify whether, for the purposes of the standby charge calculation in subsection 6(2), Opco should use the leasing cost amount paid to Gesco for an automobile or the cost of the automobile paid by Gesco?
Position: 1- According to the wording of subsection 6(2), the cost and the leasing cost amount of the automobile must both be used to calculate a reasonable standby charge in a situation involving the lease and the purchase of an automobile. In some circumstances, the formula in subsection 6(2) could provide an unexpected result. The Minister of Finance has been informed of this issue. In specific situations, the CRA has concluded that the reasonable standby charge should be calculated on the basis of the cost of the automobile or the leasing cost amount of the person who made an automobile available to the employee. In the example submitted, the CRA could consider only the leasing cost amount of the automobile for Opco for the purposes of the formula in subsection 6(2).
Raisons: 1- Wording of the Act.
APFF FEDERAL TAX ROUNDTABLE 6 OCTOBER 2017
APFF CONFERENCE 2017
Question 13
Automobile supplied to an employee and calculation of the taxable benefit
Paragraphs 6(1)(e) and 6(1)(k) deal with calculating the taxable benefit where an automobile is provided to an employee in the course of his or her work. This applies in particular where the automobile is provided directly by the employer or by a person related to the employer.
The amount for a reasonable standby charge benefit for an automobile is defined in subsection 6(2). In this formula, it is provided in Element C that the cost of the automobile to the employer or to a person related to the employer must be taken into account, if one or the other is the owner of the vehicle at any time in the year. In addition, in Element E, account must be taken of the total of all amounts that may reasonably be regarded as having been payable by the employer or to a person related to the employer to a lessor for the purpose of leasing the automobile during such of the total available days as are days when the automobile is leased to the employer or to a person related to the employer.
Consider the following situation: Holdco Inc. acquires an automobile, which is then the subject of a lease agreement between Holdco Inc. and Opco Inc. Holdco Inc. and Opco Inc. are related corporations within the meaning of Act. The rent provided for in this contract represents the amount that Opco Inc. paid to a third party for the leasing of such a vehicle. Opco Inc. then makes this automobile available to one of its employees, who is a person related to Opco Inc. and Holdco Inc.
As stated above, Element C of the formula in subsection 6(2) specifies that the cost of the automobile for the employer or for a person related to the employer must be taken into account, if one or the other is the owner of the automobile at any time in the year. This wording seems to imply that, in the above example, it would be necessary to take into account the cost of the automobile to Holdoc Inc. in calculating the standby charge, since Holdco Inc., a person related to Opco Inc., owns the automobile at a time in the year. However, in Technical Interpretation 2014-0529991E5, the CRA stated this in the context of related entities:
“With respect to the taxable benefit in respect of the standby charge for an automobile, we are of the view that it is the cost of the automobile, or the cost of renting the automobile, to the person who makes the automobile available to the taxpayer, which enters into the computation of the benefit.”
Thus, by applying this CRA position, it seems in the context of the above example that it would be more correct for the leasing cost to Opco Inc. to be used.
Question to the CRA
In the above example, for the purposes of calculating the standby charge for the automobile can the CRA clarify if Opco Inc. must use the leasing cost it pays to Holdco Inc. or must it use use Holdco’s automobile acquisition cost.
CRA Response
For the purposes of paragraph 6(1)(e), subsection 6(2) sets out a formula for the calculation of a reasonable standby charge for an automobile for the total number of days during which the automobile is made available to a taxpayer by the employer of the taxpayer or by a person related to the employer.
The formula in subsection 6(2) is worded as follows:
A/B × [2% × (C × D) + 2/3 × (E – F)]
- Element C of this formula represents the cost of the automobile to the employer or to a person related to the employer if either of them owns the vehicle at any time in the year.
- Element E is the total of all amounts that may reasonably be regarded as having been payable by the employer to a lessor for the purpose of leasing the automobile during such of the total available days as are days when the automobile is leased to the employer
In a situation where a lease and purchase are involved, the wording of the formula in subsection 6(2) requires that the cost of the automobile be added to C and that the leasing cost be added to E to calculate the reasonable standby charge for an automobile made available to an employee.
Consequently, under certain circumstances, the formula in subsection 6(2) could yield an unexpected result. This situation has been brought to the attention of the Department of Finance.
In specific situations, the CRA concluded that the reasonable standby charge should be based on the cost or the leasing costs of the automobile to the person who made the automobile available to the employee. In the example submitted and after taking into account all facts and circumstances relating to the situation, the CRA could consider only the leasing cost that Opco pays to Holdco for the purposes of the formula set out in subsection 6(2).
However, a taxpayer or its representative must exercise extreme caution when referring to a technical interpretation letter. Our comments are generally not written to cover all possible circumstances or situations. Thus, the interpretation to which you refer includes comments that have been issued taking into account the specific facts of an actual situation. In that case, only the cost of the automobile was relevant for the purpose of calculating the reasonable standby charge.
Response prepared by:
Danny Gagnon
613-670-9030
October 6, 2017
2017-070906