Principal Issues: [TaxInterpretations translation] Are fees paid by an employee for an extended warranty on an automobile deductible in the year of payment?
Are the fees paid by a self-employed person for an extended warranty on an automobile deductible in the year of payment?
Position: If the extended warranty costs in respect of the automobile are otherwise deductible under the conditions referred to in paragraph 8(1)(f) or (h.1) of the Act, as the case may be, those costs will be deductible in the year the costs are paid.
If the expenses relating to the extended warranty were incurred by the self-employed person to earn business income, the deduction of these expenses will be made in accordance with the provisions of subsection 18(9).
Reasons: The costs associated with an extended warranty are expenses of a current nature. An employee calculates employment income on a cash basis and subsection 18(9) does not apply in respect of employment income.
In the case of the self-employed, the costs of an extended warranty are paid for services to be rendered after the end of the year or for insurance covering a period after the end of the year.
XXXXXXXXXX Sylvie Labarre, CA
2004-008393
December 2, 2004
Dear Sir,
Subject: Extended warranty on an automobile
This is further to your letter of June 30, 2004, in which you asked for our opinion on the tax treatment of expenses associated with the purchase of an extended warranty on an automobile. We apologize for the delay in responding to your request.
You wish to know whether those expenses are of a current or capital nature. If a current expense paid by an employee, you wish to know if the expense is fully deductible in computing employment income in the year of payment. On the other hand, if the expense was incurred by a self-employed person, you wish to know whether subsection 18(9) of the Income Tax Act (the "Act") applies to this expense.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than through 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 that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
We are of the view that the costs associated with the extended warranty on an automobile are not part of the cost of the automobile and are not an expense of a capital nature.
We are of the view that those expenses are motor vehicle expenses. If the expenses are paid by an employee, the conditions of paragraph 8(1)(f) or paragraph 8(1)(h.1), as the case may be, must be satisfied for the employee to be entitled to a deduction. Since an employee computes income on a cash basis and subsection 18(9) does not apply to an employee, we are of the view that the extended warranty fee paid by an employee (which would otherwise be deductible pursuant to paragraph 8(1)(f) or paragraph 8(1)(h.1), as the case may be) will be fully deductible in the year of payment.
On the other hand, if the extended warranty costs are incurred by a self-employed individual to earn business income, we are of the view that the costs would not be fully deductible in the year of payment because subsection 18(9) would apply to such costs. This is because we consider that those expenses are paid for services to be rendered after the end of the year or for insurance covering a period after the end of the year.
These comments are not advance income tax rulings and do not bind the CRA in any particular situation.
Best regards,
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch