Principal Issues: [TaxInterpretations translation] a) Can the CRA clarify whether a directive has been issued to its auditors such that allowances for the use of a motor vehicle which exceed the limits provided in ITR section 7306 will be systematically considered unreasonable for the purposes of ITA paragraph 6(1)(b)?
b) Can the CRA clarify whether it considers a motor vehicle allowance that satisfies the amounts set by the TBCS to be reasonable, in the event that all other requirements of the Act are otherwise satisfied?
Position: a) No direction has been given to CRA auditors in this regard.
b) The limits provided for in section ITR 7306 are only a guide to determining the reasonableness of an allowance. The rates set by the TBCS are considered reasonable.
Reasons: Long-standing position.
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2012
2012 APFF CONFERENCE
Question 19
Reasonableness of an automobile allowance
An employee may be called upon to use the employee’s automobile in the course of employment. Where such a situation occurs, the employer can compensate the employee by paying the employee an allowance for the use of the employee’s motor vehicle. Whereas the deduction for the employer in respect of this allowance is restricted to the limits provided in ITR section 7306 (in 2012, $0.53 for the first 5,000 kilometers and $0.47 for the excess kilometers), the tax treatment of allowances received by the employee does not refer to the limits stated in that section.
Indeed, the ITA provides that amounts received by an employee in a year as a personal or living allowance or as a benefit for any other purpose shall be included in computing employment income with the exception of the allowances described in subparagraphs 6(1)(b)(i) to 6(1)(b)(ix). Among other things, subparagraph 6(1)(b)(vii.1) provides for an exemption for 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. Thus, the allowance paid to an employee for the use of the employee’s motor vehicle must be reasonable in order to avoid being taxable to the employee.
Subparagraphs 6(1)(b)(x) and (xi) provide two additional conditions. The allowance must be based solely on the kilometers traveled in the performance of the duties of the office or employment (6(1)(b)(x)) and the employee must not be reimbursed for expenses incurred for the use of the employee’s motor vehicle in addition to the allowance (6(1)(b)(xi)).
In addition, in light of various prior interpretations by the CRA, it can be said that the CRA considers that an allowance that meets the limits in ITR section 7306 is reasonable. However, the CRA has also repeatedly stated (inter alia, at this Roundtable in 2004) that it is possible that an allocation that exceeds the limits set out in the ITR can still be reasonable in certain cases.
However, in practice, more and more files show that CRA auditors consider that an allowance that exceeds the limits set out in the Regulation is not reasonable. While some seem open to discussing the "reasonableness" of the allowance, others are not open to discussion and systematically issue a notice of assessment.
In Technical Interpretation 2007-0235131E5, the CRA stated that it was of the view that the travel allowance rates established by the Treasury Board of Canada Secretariat ("TBCS") were reasonable. Thus, the CRA concluded that an allowance paid to an employee that was comparable to that allowed by the TBCS should not be included in the employee's income if all other requirements of the Act were otherwise satisfied.
Note that the allowances that the TBCS has established vary greatly from one province to another ($0.11 as between Quebec and Saskatchewan). In addition, the Government of Canada paid a non-taxable amount of $ 0.565 per kilometer for its federal employees working in Quebec for the quarter from April to June 2012, while the deductibility limit for the employer is $0.53. for the first 5,000 kilometers and $0.47 for the excess. For the last six months of 2011, such public servants working in Quebec received $0.59 while the 2011 limits were $0.52 and $0.46, respectively. The gap was even larger in 2011.
Questions to the CRA
(a) Can the CRA clarify whether a directive has been issued to its auditors that allowances for the use of a motor vehicle which exceed the limits provided in ITR section 7306 will be consistently considered unreasonable for the purposes of ITA paragraph 6(1)(b)?
(b) Can the CRA clarify whether it considers a motor vehicle allowance that satisfies the amounts set by the TBCS to be reasonable, if all other requirements of the Act are otherwise met?
CRA Response
Response to Question (a)
No direction has been given to CRA auditors that allowances for the use of a motor vehicle exceeding the limits set out in ITR section 7306 will be systematically considered unreasonable for the purposes of ITA paragraph 6(1)(b).
Response to Question (b)
The CRA is of the view that the limits in section 7306 are only a guide to determining the reasonableness of an allowance for the purposes of paragraph 6(1)(b). Depending on the particular circumstances of each situation, a rate that differs from that provided for in that section could therefore be considered reasonable. In addition, the CRA is of the view that the amounts that the TBCS sets as a travel allowance are reasonable amounts for the purposes of paragraph 6(1)(b).
Isabelle Landry
(450) 623-0193
October 5, 2012
2012-045413