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The car is a complicated beast.

Talking Tax in the May issue dealt briefly with the tax effects of certain benefits received from an employer. The discussion in this issue is addressed specifically to the rules applicable in the taxation of car benefits. For employees who are in sales or who negotiate contracts for their employers, the rules below are somewhat modified. Also, depending on when a vehicle is acquired or leased, the rules may vary.

Automobile allowances

Generally, all types of allowances received by an employee are included in employment income and hence taxable. Recall that allowances are generally pre-determined amounts paid in advance to discharge an expense, but for which the recipient would not be accountable.

In most situations, though, reasonable allowances received from his or her employer for the use of a motor vehicle for travelling in the performance of employment are specifically excluded from the purview of the general rule. Such allowances, however, are only eligible for the "carve-out" if the measurement of the use of the vehicle for the purpose of the allowance is based solely on the number of kilometers the vehicle is used in connection with the employment. The carve-out does not apply if the employee, in addition to receiving an allowance, receives a reimbursement for even a part of his or her expenses in relation to the use of the vehicle (unless the reimbursement is in respect of supplementary business insurance, parking, and toll or ferry charges).

Operating benefits

Recall that, generally, the value of benefits of any kind, whatever received or enjoyed by an employee in respect of employment, are included in and taxable as employment income. Employer-paid automobile operating expenses in respect of the employee's job would not be caught by the provision but those relating to the employee's personal use of the vehicle would. Generally, the value of these latter type of benefits can be reasonably determined as a proration of operating costs based on mileage. Note that the distances associated with travelling between the employee's home and place of work are generally considered in respect of personal use. Operating expenses include the cost of fuel, maintenance (e.g. car washes, oil, grease and servicing charges), repairs and licences.

If the employer leases or purchases a car for the employee, the employee may elect to include a fixed sum instead of the value of the operating benefit based on the actual expenses incurred by the employer, provided that the automobile is used primarily in the performance of the employee's job. It is Revenue Canada's view that "primarily" means more than 50%. The fixed sum is one-half of the "reasonable standby charge" to the extent that it exceeds all amounts related to the automobile's operation paid by the employee to the employer in writing of the employee's election before December 31 of the taxation year in question (Form TD5).

Standby charge

Apart from any benefits arising in respect of the operation of a vehicle, there is also a benefit enjoyed by the employee if the employer makes an automobile available to an employee who uses it at least in part for personal use. In this case, although the value of this kind of benefit is expressly excluded from the general inclusion rule, the federal Income Tax Act stipulates that the employee must include in income a "reasonable standby charge" to the extent it exceeds any amount paid to the employer for the use of the automobile, other than operating expenses. A reasonable standby charge is calculated each month as 2% of the employer's capital cost for the automobile or two-thirds of the monthly lease payments (excluding the insurance portion).

The reasonable standby charge may be reduced if the personal use of the automobile is limited to 12,000 km/y or less, and all or substantially all of the distance travelled by the automobile is in connection with the employment. It is Revenue Canada's view that at least 90% of the total distance should relate to the job in order to qualify. Form TD5 must be completed by the employee and returned to his or her employer by January 31 of the immediately following year.

Employee's deductions

If reasonable motor vehicle expenses incurred in the performance of employment are not employer-paid, then they may be deducted from an employee's income under paragraph 8(1) (h.1) of the Act, provided that he or she did not receive a motor vehicle expense allowance that was excluded from the employee's income (as explained earlier). As well, the employee must have been required under the contract of employment to pay such expenses and was ordinarily required to carry on the duties of employment away from the employer's place of business or in different places. Revenue Canada considers "ordinary" to mean "customarily" or "habitually" rather than "continually" and the term, "in different places", for example, refers to situations where an inspector is required to travel from one inspection site to another or where an employee is required to travel from building to building within the boundaries of the employer's very large property.

In the employee's income tax return for the year, the employee must include Form T2200 in which the employer certifies that the employee has met the prerequisite requirements for deductibility.

In the case where the employee leases a vehicle, lease payments would also be included under the rubric of motor vehicle expenses. The amount deductible is, however, limited to the lesser of the actual payments or $650 per month (for leases entered into prior to September 1, 1989, the amount is $600 per month) or $24,000, divided by 85% of the manufacturer's suggested list price (or $28,235, whichever is higher), times the actual annual lease charges. Form T777 should be completed by the employee and filed with his or her tax return.

In the case where the employee uses his or her own car, and meets the requirements for deductibility under paragraph 8(1)(h.1) of the Act, he or she can deduct any interest paid for the year up to approximately $3,600 on borrowed money used to acquire the motor vehicle. The employee may also deduct capital cost allowance at a declining balance rate of 30% (15% in the year of acquisition) calculated on the original cost of the vehicle (for a passenger vehicle the cost is limited to $24,000).
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Author:Yip, Douglas
Publication:Canadian Chemical News
Date:Jun 1, 1992
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