A. Humenuk 957-2135 DEC 28 1988
Re: Automobile Allowance Policy
We are responding to your letter of November 22, 1988, in which your [sic] ask whether a reimbursement of travelling expenses, based on business kilometres driven, will be deductible to the employer and/or taxable to the employee as a benefit under paragraph 6(1)(b) of the Income Tax Act (the "Act").
As the amount paid to the employee is not dependent on actual expenses incurred, the amount paid per kilometre would, in our view, be more properly termed an allowance. In addition, we assume that this allowance is paid specifically for the use of the employee's automobile rather than for travailing expenses in general.
As we understand the situation, the employees will be required to use their own vehicles and will receive an allowance from the employer based on the kilometres driven in the performance of the duties of office or employment. The standard rate upon which the allowance is to be calculated will be 27 cents per kilometre for the first 5000 kilometres ant 24 cents per kilometre for kilometres driven over and above the initial 5000 kilometres. A monthly advance will be given to the employees who are using their own automobile and a periodic reconciliation of kilometres driven to the advance received will be mate.
As a result of new legislation, paragraph 18(1)(r) of the Act may reduce the employer's deduction for an automobile allowance paid unless the amount so paid or payable was required to be included in the recipient's income. The maximum deduction for an automobile allowance is limited to the lesser of the amount paid or payable and 27 cents per kilometre for the first 5000 kilometres driven and 21 cents per kilometre for kilometres driven in excess of the initial 5000 kilometres. The maximum deduction is increased by an additional 4 cents per kilometre for an allowance paid or payable in respect of kilometres driven in the Yukon or Northwest Territories.
Assuming that the standard rate is, in fact, the rate paid or payable, that the allowance is not required to be included in the recipient's income, and that none of the travel is in either the Yukon Territory or the Northwest Territories, it is our opinion that the employer's deduction for the amount paid or payable will be reduced by the amount of the allowance in excess of the prescribed rate (i.e. by the 24 cents - 21 cents per kilometre rate paid for kilometres in excess of 5000 kilometres).
Although the rules are slightly different for clergymen and certain salesmen described in subparagraphs 6(1)(b)(v) and (vi) of the Act, an automobile allowance paid to any other employee will only be excluded from income if;
(i) the allowance is not in excess of a reasonable amount, (ii) the allowance is based solely on the number of kilometres the vehicle is driven in the performance of the duties of his office or employment; and (iii) the taxpayer does not receive both an allowance and a reimbursement in whole or in part of the expenses incurred in respect of the same use of his vehicle.
Whether a particular allowance is in excess of a reasonable amount or not is a question of fact. Although an allowance based on the 27 cents/21 cents per kilometre rate specified in draft Regulation 7305 may be considered reasonable in many situations, it is our view that the actual costs incurred by an employee should be taken into consideration in determining what would be a reasonable rate for the allowance. Furthermore, the fact that the rate referred to in your letter is in excess of the rate specified by the Regulation does not necessarily mean the allowance is in excess of a reasonable amount.
If the allowance in question meets the criteria listed above, the amount will not be included in income of the employee and the employer will be restricted in its claim for a deduction for the allowance to the amount specified by paragraph 18(1)(r) of the Act.
In your list of facts submitted, you indicate that the employee will have a written contract of employment which will specify that the use of his personal vehicle for company purposes is a condition of employment. While this fact does not alter our position, it is the actual use of the employee's vehicle in the performance of the duties of office or employment rather than the pre-existing requirement to so use it, which is relevant to the determination of whether or not the allowance is taxable under paragraph 6(1)(b) of the Act. However, an employee who is not in receipt of a non-taxable allowance will only be allowed to claim automobile expenses if, among other things, such a requirement exists. Your comments on record-keeping and the procedure for payment of the allowance have been noted. If you have any questions concerning the suitability of either, you should contact the Source Deductions Section of your local District Taxation Office located at 305 Dorchester Blvd. West, Montreal, H2Z 1A6.
We trust our comments will be of assistance to you.
Your truly,
Original Signed By
P. D. Fuoco for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch