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If you’re required to use your own vehicle for work, perhaps to visit clients or for other work reasons, most employers will reimburse you based on a per-kilometre basis and, provided the reimbursement is reasonable, it need not be included in your income for tax purposes.
But a recent case shows what can happen when an employer provides its employees with an allowance that’s not entirely based on the actual kilometres the employee has driven.
Before delving into this latest employment expense case, let’s review the general rules for deducting automobile expenses. If you’re an employee who needs to use your car for work, you must meet certain conditions in order to deduct some of your automobile expenses on your tax return.
First, you must normally be required to work away from your employer’s place of business or in different places. Second, under your contract of employment, you must be required to pay your own automobile expenses, and this must be certified by your employer on a signed copy of CRA Form T2200, Declaration of Conditions of Employment.
Finally, you must not be the recipient of a “non-taxable” allowance for motor vehicle expenses. An allowance is considered to be non-taxable when it is solely based on a “reasonable” per-kilometre rate. For 2023, the Canada Revenue Agency considers a reasonable rate to be 68 cents per kilometre for the first 5,000 kilometres driven, and 62 cents/km after that. In the territories, the rate is four cents/km higher.
If your employer reimburses you, but you feel the amount was not reasonable to cover the actual operating costs of your vehicle, you can deduct the employment portion of your vehicle operating expenses provided you include the employer vehicle allowance you received in your income.
Travel expenses taxable?
This most recent case involved a Kelowna, B.C. taxpayer who has worked as a boilermaker for more than 30 years. The terms of his employment are governed by a collective agreement between his union and the Boilermaker Contractors’ Association of British Columbia, an umbrella association of member companies who together are the taxpayer’s “employer.”
The taxpayer said his union hall typically calls him at his home to let him know what and where his next job is, and most of his jobs require him to drive from Kelowna to other locations. In the years under review, the taxpayer travelled to jobs in various parts of B.C., such as Port Alice, Fort Nelson, Trail, Kamloops, Castlegar, Quesnel and Crofton, as well as Edmonton, among other locations.
The issue in the case was whether the travel allowances received by the taxpayer of $4,006 in 2014 and $6,590 in 2015 were taxable, and whether any amount of his motor vehicle expenses was deductible from his employment income in those years.
The issue arose because in 2014 and 2015, the collective agreement changed the way travel allowances were calculated and paid to employees. The process for reimbursing employees for travel was streamlined by eliminating the need for receipts and using a single location as a common starting point for calculating the per-kilometre reimbursement for all work-related trips. The changes also ended up affecting the employees’ tax treatment.
In the previous collective agreement, the taxpayer’s employer paid him his hourly rate for travel time, plus full airfare and transportation costs to his hotel. Under the new collective agreement, which governed the tax years under review, the employer reimbursed the taxpayer for use of his motor vehicle by paying a travel allowance calculated using the CRA’s annual per-kilometre vehicle rate, measured using Burnaby City Hall as a common starting place for all workers, regardless of whether a person actually set out from there (which the taxpayer typically did not). There was no additional payment or reimbursement for travel time or expenses incurred, subject to specific exceptions for expenses such as ferries, tolls, taxis and airfare.
The taxpayer testified he didn’t have to submit receipts for travel under this regime, and would automatically receive the allowance if he was dispatched to an out-of-town worksite. He said this new method of calculating the allowance sometimes paid him less than it actually cost him to travel, and sometimes it paid him more, so it “likely averaged out” at the end of the year. He also recalled that under the previous collective agreement, his travel reimbursements were never subject to tax.
During the CRA audit, the taxpayer provided copies of forms T2200 for 2014 and 2015, dutifully signed by one of the companies he did a significant amount of work for in those years. On the form, the employer confirmed the taxpayer was required to pay expenses for which he did not receive an allowance or reimbursement and confirmed it did pay the travel allowances under review by the CRA.
The judge reviewed the facts and the legislation. Put simply, the legislation states that an allowance for motor vehicle expenses must be “wholly reasonable” in order to be excluded from employment income. Allowances that are unreasonable must be included in income in their entirety, as the taxpayer has no discretion to carve out a reasonable portion from the rest. As a result, if a car allowance is considered unreasonable and must therefore be included in the taxpayer’s income, the taxpayer can deduct their actual motor vehicle expenses from their income.
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The judge ruled that since Burnaby City Hall is “an arbitrary starting point,” the allowance was not solely based on the number of kilometres driven by the taxpayer, and was therefore not reasonable and needed to be included in income.
As for the possible deduction of the taxpayer’s actual motor vehicle expenses, this matter was left unclear. Since the collective agreement allows the taxpayer (and other boilermakers) to live and base themselves in or outside B.C.’s Lower Mainland, the judge queried whether travel from one’s home to the out-of-town locations is personal versus work-related.
Nevertheless, without the taxpayer providing his actual expenses, the judge was not willing to allow the taxpayer to simply deduct expenses equivalent to the amount of the taxable allowances.
A most unfortunate result for the taxpayer.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. [email protected].
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