Principal Issues: What are the tax consequences when an employer increases a travel allowance it pays to its employees by an additional amount for each person accompanying the driver?
Position: For each trip where an employee receives such additional amount, the total amount of the allowance for that trip is taxable under paragraph 6(1)(b).
Reasons: The two parts of the allowance constitute a single allowance since they relate to the same use of the vehicle. The allowance is deemed not to be reasonable under subparagraph 6(1)(b)(x) since the use of the vehicle is not based solely on the number of kilometres driven to perform job functions.
XXXXXXXXXX 2019-081266
November 29, 2023
Dear Sir,
Subject: Kilometric allowances and car sharing
This is in response to Question 7, reproduced below, which you asked us to answer as part of the Federal Tax Roundtable at the 2019 Conference concerning business travel allowances in a car-pooling context.
Background
In order to encourage carpooling and have a positive effect on the environment, several companies have modified their business travel allowances to encourage carpooling.
Consider the example of a company with the following rates:
- Per kilometre rate: $0.50
- Additional allowance of $0.10 per kilometre for each additional person accompanying the driver.
The Income Tax Act (the "Act") provides that an allowance for the use of a motor vehicle received by an employee from their employer for travel in the course of employment is not taxable if it is reasonable in accordance with subparagraph 6(1)(b)(vii.1).
An allowance is deemed not to be reasonable by virtue of subparagraphs 6(1)(b)(x) and (xi) if the allowance is not based solely on the number of kilometres driven in the course of employment or if the taxpayer receives both an allowance for the use of the vehicle and reimbursement for all or part of the taxpayer’s expenses for the same use.
Your questions
Does providing for an additional amount per person accompanying the driver have the effect of making the allowance taxable?
If so, is it only the additional amount that becomes taxable or the entire allowance?
Our answer
In the example submitted, for each trip where an employee receives an additional amount per accompanying person, we are of the view that the total amount of the allowance for that trip is taxable under paragraph 6(1)(b).
In such a situation, we consider that the two parts of the allowance constitute a single allowance since they relate to the same use of the vehicle. In addition, we are of the opinion that this allowance is deemed not to be reasonable under subparagraph 6(1)(b)(x) because the use of the vehicle is not determined solely on the basis of the number of kilometres driven to perform the duties of the employment.
That said, the Canada Revenue Agency's mandate is to administer the Act as written. The development of tax policy and amendments to the Act are the responsibility of the Department of Finance Canada. Consequently, any concerns regarding tax policy should be directed to the Department of Finance.
Best regards,
Isabelle Landry
Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch