2016-0673831E5 Motor vehicle allowances

Principal Issues: The tax consequences of an employer-provided motor vehicle allowance.

Position: Question of fact.

Reasons: See response.

Author: Underhill, Cynthia
Section: ITA: 6(1)(b), 6(1)(b)(v), (vi), (vii.1), (x), and (xi)

XXXXXXXXXX                                                                                                         2016-067383
                                                                                                                                 C. Underhill
September 28, 2018

Dear XXXXXXXXXX:

Re:  Motor vehicle allowances

We are writing in response to your correspondence dated October 3, 2016, and subsequent telephone conversations (Underhill/XXXXXXXXXX), in which you asked about the tax consequences of an employer-provided motor vehicle allowance under the Income Tax Act (Act). Thank you for your understanding regarding the delay of this response.

In the situation described, an employee is paid a flat amount of $XXXXXXXXXX per month, plus, if eligible, an additional variable payment. You confirmed that the allowance works as follows:

*     The employee receives the flat amount at the beginning of each month, and if eligible, receives an additional payment at the end of each month;

*     The employee is eligible for the additional payment where the actual kilometres driven for employment purposes is greater than the flat amount divided by the per-kilometre rate. The additional payment is computed by:

1.    Multiplying the total employment kilometres driven in the month by the per-kilometre rate; then

2.    Deducting the monthly flat amount (i.e., $XXXXXXXXXX).

You have indicated that the per-kilometre rate fluctuates depending on the terms of the collective agreements. At this time, the rate agrees to the amounts prescribed in section 7306 of the Income Tax Regulations.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). 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 a particular transaction 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 IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Subject to certain conditions, subparagraphs 6(1)(b)(v), (vi), and (vii.1) of the Act provide that reasonable motor vehicle allowances received by employees in respect of travelling in the performance of their duties may be excluded from income. Subparagraph 6(1)(b)(x) of the Act deems a motor vehicle allowance not to be reasonable if it is not based solely on a per-kilometre rate. The per-kilometre rate must be reasonable. Furthermore, an allowance is deemed not to be reasonable by subparagraph 6(1)(b)(xi) of the Act if an employee receives both an allowance for the vehicle and a reimbursement for expenses (in whole or in part), for the same use of the motor vehicle. Consequently, any motor vehicle allowance that does not comply with the specific rules in subparagraphs 6(1)(b)(x) and (xi) of the Act will be deemed not to be reasonable and must be included in the employee’s income.

Although you administer the motor vehicle allowance by providing up to two separate payments to an employee in a month, the collective agreements provide that an employee who is required to use his or her motor vehicle in the performance of employment duties is entitled to receive the greater of a flat amount or a per-kilometre allowance.

Where an employee receives the per-kilometre allowance in a particular month, provided the per-kilometre rate for employment-related travel is reasonable, the amount would generally be excluded from the employee’s income by subparagraph 6(1)(b)(v), (vi), or (vii.1) of the Act. The fact that the employee could have received a flat amount in respect of his or her employment-related travel would not affect this position.

However, where an employee receives a flat amount regardless of how many kilometres he or she drives for employment purposes in a month, the allowance would not be considered reasonable for purposes of subparagraphs 6(1)(b)(v), (vi), and (vii.1) of the Act, and must be included in the employee’s income. In such cases, subparagraph 6(1)(b)(x) will deem the allowance not to be reasonable because the allowance is not based solely on the number of kilometres driven.

If it is determined that a motor vehicle allowance (per-kilometre or flat amount) received by an employee is not reasonable and the allowance is included in the employee’s income, he or she may be entitled to claim a deduction for actual motor vehicle expenses incurred in the course of carrying out his or her employment duties provided the following conditions are also met:

1.    The employee was normally required to work away from his or her employer’s place of business or in different places.

2.    Under the contract of employment, the employee had to pay his or her own motor vehicle expenses.

3.    The employee has a copy of Form T2200, Declaration of Conditions of Employment, which has been completed and signed by his or her employer.

For more information on motor vehicle allowances, go to canada.ca/automotor-allowances or see Chapter 2 of Guide T4130, Employers’ Guide – Taxable Benefits and Allowances, which is available on the CRA website at www.cra-arc.gc.ca.

We trust our comments will be of assistance to you.

Yours truly,

Nerill Thomas-Wilkinson, CPA, CA
Manager
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2018

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2018