We are writing in reply to your letter of September 11, 1990, wherein you requested that we confirm your interpretation of subparagraphs 6(1)(b)(x) and (xi) of the Income Tax Act and subclauses 3(4) and (7) of the Draft Income Tax Amendments (the "Draft Amendments") which were released by the Minister of Finance in July, 1990.
Your understanding of the current law is that where an employee receives an allowance from an employer for the use of a motor vehicle for travelling in the performance of the duties of his office or employment, that allowance is not included in income unless it is in excess of a reasonable amount. Under subparagraph 6(1)(b)(x) and (xi) of the Act, an allowance is deemed to be in excess of a reasonable amount where either the allowance is not based on a per kilometre charge or the employee receives both an allowance in respect of the use of the motor vehicle and is reimbursed for expenses incurred in respect of the same use. Where the allowance is in excess of a reasonable amount the employee is required to include that allowance in income and, if the other criteria set out in paragraph 8(1)(h) of the Act are also met, the employee is entitled to deduct amounts expended in the year for travelling in the course of his employment.
The Draft Amendments propose to amend paragraph 6(1)(b) of the Act by providing that the reimbursement of an employee's expenditures for supplementary business insurance, parking, toll or ferry charges will not render an allowance "unreasonable". Consequently, an employee who is reimbursed for parking charges, for example, will not for that reason alone be required to include the entire allowance in income, assuming that the allowance and reimbursement meets all other "reasonableness" criteria.
Although the Draft Amendments are proposed to be effective for the 1988 and subsequent taxation years, taxpayers will have the option of electing not to have the amendment apply in respect of the 1988 and 1989 taxation years. Therefore, a taxpayer who was reimbursed for parking expenses for 1988 and 1989 and who makes such an election in respect of those years would continue to be required to include the allowance in income and would be entitled to a corresponding deduction under proposed paragraph 8(1)(h.1) of the Act.
You have noted that by the time the Draft Amendments are enacted, most taxpayers will have received Notices of Assessment in respect of the 1988 and 1989 taxation years, and the time limit for objecting to these assessments will have expired. You asked whether we agree with your understanding of the effect of the current and proposed new rules in this regard and whether the Department would allow returns for 1988 and 1989 to be amended so that taxpayers who do not make the proposed election could take advantage of the rules proposed in the Draft Amendments.
Our Comments
We agree with your understanding of the current and proposed rules as outlined above. We have also discussed the reassessment issue with the Examination Division of Assessing and Enquiries Directorate and they advise that, provided that the proposed amendments are enacted in their present form, and that taxpayers wishing to request an adjustment to their 1988 and 1989 income tax returns do so within three years of the date of original assessment of the return in question, the Department will make the necessary adjustments to that return. If you have any questions concerning the Department's assessing practices in this area, please contact Mr. W.S. Hume, Director, Examination Division, Assessing and Enquiries Directorate, 400 Cumberland street, Ottawa, K1A 0L8.
We trust that our comments are of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
c.c. Mr. W.S. Hume Mrs. P.M. McNally