Principal Issues: 1. What is the tax treatment of an expense incurred or made by a taxpayer for the anti-theft marking of an automobile used in the carrying on of a business? 2. If the expense for the anti-theft marking of an automobile is of a current nature, does subsection 18(9) apply? 3. Whether an employee may take advantage of the method of calculating the automobile operating expense benefit provided for in subparagraph (iv) of the element A in paragraph 6(1)(k) of the Act after the end of a given year by notifying his employer in writing, after the end of that given year, of his intention to take advantage of it.
Position: 1. None. 2. Although subsection 18(9) could be applied in a situation where the anti-theft marking expense clearly relates to future periods, current practice is to disregard adjustments for minimal amounts. 3. No.
Reasons:
1. Question of fact. 2. Administrative position. 3. Wording of the Act.
XXXXXXXXXX 2015-059676 Jean-François Benoit, CPA, DESS Fisc.
March 14, 2024
Dear XXXXXXXXXX,
Subject: Tax treatment of costs of anti-theft marking of an automobile and written notice of intention to rely on subparagraph (iv) of the description of A in paragraph 6(1)(k)
This letter is in response to your letter of June 22, 2015 in which you first asked about the tax treatment of an expense made or incurred by a taxpayer for the anti-theft marking of an automobile used in carrying on a business. You stated that this automobile may be purchased or leased. You also indicated that anti-theft marking entails engraving a code on the principal parts of an automobile. This can be done directly at the dealership before the owner or lessee takes possession of the car. It can also be done later, after the owner or lessee has taken possession of the car, either at the dealership or at another supplier of such services.
More specifically, you wish to know whether the cost of anti-theft marking on an automobile in your situation is an expense of a current or capital nature. If it is a current expense, you wish to know whether subsection 18(9) of the Income Tax Act (the "Act") applies to that expense.
Secondly, you asked whether an employee may utilize the method for calculating the benefit in respect of automobile operating expenses provided for in subparagraph (iv) of the description of A in paragraph 6(1)(k) of the Act after the end of a particular year by notifying the employer in writing, after the end of that particular year, of the employee’s intention to utilize that method.
We apologize for the delay in dealing with your request.
Unless otherwise indicated, all legislative references are to the provisions of the Act.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations ("IC 70-6R12").
Anti-theft marking
Pursuant to subsection 9(1), a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property for the year. Generally, a taxpayer may deduct reasonable expenses of a current nature incurred by the taxpayer in order to earn business income where the deduction is not otherwise restricted, in particular by the application of paragraphs 18(1)(a), (b), (h), subsection 18(9), sections 67 and 67.3.
Pursuant to paragraph 18(1)(a), in computing a taxpayer's income from a business or property, expenses are not deductible except to the extent that they were made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property. However, paragraph 18(1)(b) does not allow capital expenditures to be deducted in computing the taxpayer's income, except as expressly permitted by the Act. The question of whether a payment is made on account of capital or whether it is a current expense requires an examination of the principles for distinguishing between the two. Since the Act does not define what constitutes a capital expenditure, it is necessary to refer to the general principles applicable to the deductibility of an expenditure for tax purposes established by the Act, jurisprudence and administrative positions.
The Canada Revenue Agency has included certain guiding principles in paragraphs 1.4 to 1.12 of Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance, to help taxpayers determine whether an expenditure is current or capital in nature.
Paragraph 1.2 of the Folio indicates that no single guideline is determinative. All of them are relevant and each should be considered in relation to the other rather than as separate tests. The purpose of the expenditure from a practical and business perspective should also be taken into account. Ultimately, whether an expense is incurred on account of income or capital is a determination that can only be analyzed in the light of the particular circumstance of each situation.
That said, it is only in light of all the facts and relevant documentation that it would be possible to determine how an expense associated with anti-theft marking should be treated in a particular situation. However, as a general comment, we could consider that an expense made or incurred for the anti-theft marking of an automobile is an expense of a current nature insofar as:
- the expense does not substantially increase the value of the automobile;
- the only benefit resulting from this expense is related to the insurance premium;
- the expense does not improve the automobile (for example, there is no improvement in performance or lifespan);
- the amount of the expense is small in relation to the value of the automobile.
The time at which the expense for anti-theft marking of an automobile is incurred and whether the automobile is leased or purchased are not relevant in determining whether the expenditure is current or capital in nature.
Regarding your question on the application of subsection 18(9), which requires a taxpayer to apportion certain expenses made or incurred with the taxation year to which they can reasonably be related, we refer you to paragraph 5 of IT-417R2 ARCHIVED - Prepaid Expenses and Deferred Charges.
As indicated in that paragraph, we consider that the Act requires that all material costs that clearly relate to future periods be expensed in those periods if failure to defer the expense would distort the net profit not only for the year during which the expense was incurred but also for the subsequent year or years to which the benefit relates.
Although subsection 18(9) could apply in a situation where the anti-theft marking expense clearly relates to future periods, the current practice is to disregard adjustments for minimal amounts.
Written notice of intention to use subparagraph (i) of the description of A in paragraph 6(1)(k)
Paragraph 6(1)(k) provides for the calculation of the benefit to be included in a taxpayer's income in respect of automobile operating expenses made available by the employer where a standby charge for the automobile has been determined.
This benefit is calculated using one of the two methods provided for in subparagraphs (iv) and (v) of the description of A in paragraph 6(1)(k). Where subparagraph (iv) of the description of A in paragraph 6(1)(k) applies, 1/2 of the amount determined under subparagraph 6(1)(e)(i) in respect of the automobile in computing the taxpayer’s income for the year.
In order to use the calculation method provided for in subparagraph (iv) of the description of A in subparagraph 6(1)(k), the employee must notify the employer, in writing, before the end of the year of the employee’s intention to utilize this method. If all the conditions set out in subparagraph (iv) of the description of A in subparagraph 6(1)(k) are not satisfied, the employer must calculate the benefit pursuant to subparagraph (v) of the description of A in subparagraph 6(1)(k).
There is nothing in the Act that allows an employee to utilize the computation method provided for in subparagraph (iv) of the description of A in paragraph 6(1)(k) for a particular year if the employee has not notified the employer in writing before the end of that particular year of the employee’s intention to use that method.
Best regards,
Isabelle Landry
Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch