Car Allowances Based on Estimated Travel Taxable
The Income Tax Act provides that a car allowance paid to an employee is not taxable if it is reasonable. If it unreasonable, it is taxable.
A further rule provides that a car allowance is deemed to be unreasonable, and therefore taxable, if the allowance is not based solely on the number of kilometres driven in the course of employment.
In the recent Positano case, the taxpayers were brothers employed in a family snow-plowing business. One of their duties was to do “snow runs”, under which they would drive to streets and neighbourhoods to determine whether snow plowing would be needed. The brothers were paid a car allowance for the snow runs, which were based on estimated travel and average travel distances throughout the year. The CRA held that the allowances were taxable because they were not based solely on the number of kilometres driven in the course of employment.
The taxpayers appealed to the Tax Court of Canada, but the Court upheld the CRA assessment saying that an estimate is not good enough. As a result, the allowances paid to the taxpayers were taxable.
