14 July 1997 External T.I. 9706835 - CAPITAL COST ALLOWANCE ON AUTOMOBILES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether a claim for capital cost allowance for purposes of paragraph 8(1)(j) should be based on the fair market value of the motor vehicle at the time the employee began to use it for employment purposes even though the employee was not entitled to such a claim in previous years as the employee received a reasonable allowance which was not included in income by virtue of subparagraph 6(1)(b)(vii.1). Also, in such circumstances, will the half-year rule apply in the first year in which the employee makes a capital cost allowance claim for the vehicle?

Position:

Generally, the capital cost of a motor vehicle for capital cost allowance purposes is its original cost unless the Act provides otherwise. Where the employee is deemed by paragraph 13(7)(b) to have acquired the vehicle at a capital cost equal to its fair market value at the time the employee began to use the vehicle for employment purposes, the employee's claim for capital cost allowance for purposes of paragraph 8(1)(j) will generally be based on the deemed capital cost. Where the "automobile" is a "passenger vehicle", the capital cost otherwise determined will be subject to the provisions of paragraphs 13(7)(g) and (h). In the circumstances described, the half-year rule in subsection 1100(2) of the Regulations will not apply as the vehicle was not acquired in the year in which the capital cost allowance claim is being made.

Reasons:

In the circumstances described, there is no specific rule to deem a disposition and acquisition at fair market value in the first year in which capital cost allowance may be claimed under paragraph 8(1)(j).

XXXXXXXXXX 5-970683

Attention: XXXXXXXXXX

July 14, 1997

Dear Sirs:

Re: Capital Cost Allowance on Automobiles - Paragraph 8(1)(j)

This is in response to your letter of March 5, 1997 concerning the application of paragraph 8(1)(j) of the Income Tax Act (the "Act") and subsection 1100(2) of the Income Tax Regulations ("Regulations").

Your query relates to a situation where, in previous years, the employer has paid an allowance to employees for use of their motor vehicles. Such an allowance was not included in the employees' income by virtue of subparagraph 6(1)(b)(vii.1) of the Act. You advise that the employer has revised the allowance formulae for use of motor vehicles such that the allowance will no longer be excluded from income pursuant to subparagraph 6(1)(b)(vii.1) of the Act. Accordingly, the allowance will be included in the employees' income and the employees will be entitled to claim motor vehicle expenses. You have asked for confirmation that the capital cost allowance claim for purposes of paragraph 8(1)(j) of the Act will be based on the fair market value of the vehicle at the time the employee began to use it for employment purposes, without application of the half-year rule under subsection 1100(2) of the Regulations.

The determination of the proper tax consequences relating to any particular situation will depend on an analysis of all the facts, documentation and other information pertaining to the situation. To the extent that you require assistance in determining the tax treatment with regard to a completed transaction, you should contact your district tax services office. To the extent that you require confirmation of the tax consequences of proposed transactions, your request should be the subject of a request for an advance income tax ruling. However, we can provide you with the following general comments which are not binding on the Department.

Whether or not an allowance is reasonable and is therefore excluded from employment income by virtue of subparagraph 6(1)(b)(vii.1) of the Act is a factual determination to be made on a case by case basis. If it is determined that the allowance is not reasonable, such allowance will be included in the employees' income and the employees may claim the related motor vehicle travelling expenses and certain motor vehicle costs under paragraphs 8(1)(h.1) and (j) of the Act, respectively.

Paragraph 8(1)(j) of the Act allows an employee who is entitled to deduct expenses under paragraph 8(1)(f), (h) or (h.1) of the Act to claim capital cost allowance on a motor vehicle used in the performance of the duties of the office or employment as is allowed by the Regulations. Generally, where a motor vehicle has been used solely for employment purposes from the time of acquisition, the capital cost of the motor vehicle for capital cost allowance purposes would be the original cost of the vehicle. However, if there has been a change in use from some other purpose to an income gaining or producing purpose, the capital cost is deemed to be an amount as determined under paragraph 13(7)(b) of the Act. That provision deems the employee to have acquired the motor vehicle at the time of the change in use at a capital cost equal to the fair market value of the motor vehicle at that time if the fair market value is less than the amount determined under subparagraph 13(7)(b)(ii) of the Act. Where the "automobile" is a "passenger vehicle", the capital cost otherwise determined is subject to the provisions of paragraphs 13(7)(g) and (h) of the Act.

In our view, it would appear that provided there was no change in use a capital cost allowance claim under paragraph 8(1)(j) of the Act would be based on the capital cost of the motor vehicle (determined in accordance with the above comments) at the time the employee began to use the vehicle for employment purposes even though the employee was not entitled to such a claim in previous years as the employee received a reasonable allowance which was not included in income by virtue of subparagraph 6(1)(b)(vii.1) of the Act. It is also our view that, in the circumstances described, the half-year rule in subsection 1100(2) of the Regulations would not apply in the first year in which the employee became entitled to claim capital cost allowance pursuant to paragraph 8(1)(j) of the Act since the motor vehicle was not acquired nor did it become available for use in that year. It is a question of fact whether there is a change of use in any particular situation.

Finally, we note that in cases where a motor vehicle is used partly for employment purposes and partly for personal purposes, reference should be made to IT-522R for information on the calculation of the capital cost allowance claim.

We trust that the above comments will be of assistance.

Yours truly,

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch