Principal Issues: [TaxInterpretations translation] An allowance for the use of a motor vehicle is paid for each kilometre driven up to a certain number of kilometres driven in a particular period. Once this threshold is reached, no allowance is paid. Does subparagraph 6(1)(b)(x) deem the allowance unreasonable?
Position: No.
Reasons: There is no indication that the use of the vehicle is not assessed solely on the basis of the number of kilometres driven in order to determine the allowance.
XXXXXXXXXX 2017-071304
March 5, 2021
Dear Ms. XXXXXXXXXX,
Subject: Allowance for the use of a vehicle
This letter is in response to your email of June 29, 2017, in which you seek our comments on whether an allowance for the use of a motor vehicle by an employee in the performance of the duties of the employee’s office or employment will be considered reasonable.
Specifically, you described a situation where an employer has a policy of paying an employee an allowance for the use of a motor vehicle of a fixed amount per kilometre driven for the use of the employee's vehicle in the course of the employee’s duties, up to a maximum number of kilometres driven during a particular period. No allowance is paid for any excess kilometerage. We understand that you wish to know whether the allowance in question is deemed not to be reasonable by virtue of subparagraph 6(1)(b)(x) of the Income Tax Act (the "Act").
All legislative references in this letter are to the provisions of the Act.
Our Comments
This technical interpretation provides general comments on provisions contained in the Act and other related legislation, where applicable. It is not intended to confirm the tax treatment of any particular situation involving a particular taxpayer, but rather to assist you in making that determination. Our Directorate only confirms the tax treatment of particular transactions in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.
Under paragraph 6(1)(b), and subject to certain exceptions, any amount received by a taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose must be included in computing the taxpayer's income.
Among the exceptions referred to above, subparagraph 6(1)(b)(vii.1) refers to reasonable allowances for the use of a motor vehicle received by an employee (other than an employee employed in connection with the selling of property or the negotiating of contracts for the employer) from the employer for travelling in the performance of the duties of the office or employment.
For the purposes of subparagraph 6(1)(b)(vii.1), subparagraph 6(1)(b)(x) provides 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 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.
In general, we are of the view that the mere presence of a capping policy such as the one at issue here is not sufficient to conclude that an allowance paid to an employee is deemed not to be reasonable by virtue of paragraph 6(1)(b)(x).
Furthermore, we are of the view that an allowance calculated on the basis of a rate per kilometre is considered reasonable if all the following conditions are satisfied:
- Vehicle use is assessed solely on the basis of the number of kilometres driven on business;
- the rate per kilometre is reasonable;
- the employer has not reimbursed the employee for any expenses related to that use of the vehicle.
We are of the view that a kilometric rate is reasonable if it is intended to cover the expenses incurred by an employee for the use of a motor vehicle in the performance of employment duties. For example, to justify that a kilometric rate would be reasonable, one could consider, inter alia, the type of vehicle, road conditions and the cost of gasoline or electricity at the specific location.
The situation described in your request is unique in that it presents the possibility that an employee may, for a portion of the total distance travelled in the performance of employment duties, receive no allowance. In such a case, the allowance may not be high enough in relation to the expenses that the employee is expected to incur in a specific situation and thus may not be reasonable for the purposes of subparagraph 6(1)(b)(vii.1). If so, the allowance would be a taxable benefit that the employee would have to include in employment income under paragraph 6(1)(b).
The question of whether an allowance is reasonable is a question of fact to be resolved on the basis of the circumstances of each case. Consequently, we cannot express a view on the reasonableness of the allowance here.
Best regards,
Michel Lambert, CPA, CA, M. Fisc.
Manager
Employment Income Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch