Friday, February 1, 2013
In I-D Foods Corporation v. The Queen (2013 TCC 15) the court was asked to determine if the corporation was allowed a GST input tax credit (ITC) on car allowances paid to employees.
Under paragraph 174(c) the Excise Tax Act (ETA), an employer is allowed an ITC “if the allowance were a reasonable allowance for the purposes of that subparagraph.” The relevant subparagraph it refers to is subparagraph 6(1)(b)(v) of the Income Tax Act (ITA). Under paragraph 6(1)(b), a car allowance is not a taxable benefit if it is reasonable. Subparagraph 6(1)(b)(x) deems, for the purposes of subparagraphs 6(1)(b)(v), (vi), and (vii.1), an allowance is not reasonable if it is not based solely on the number of kilometres used.
In this case, for the purposes of determining if the amounts were taxable benefits under the ITA, the judge concluded the allowances were not reasonable since the amounts were, in large measure, based on estimates of what an employee would drive for a given territory and not on actual kilometres driven. For the purpose of the ITA, subparagraph 6(1)(b)(x) applied, but did it apply to the ETA?
The judge writes at paragraph 27,
“Although one could argue that subparagraph 6(1)(b)(x) of the ITA does not apply for the purposes of 174(c) of the ETA on the basis that paragraph 174(c) does not explicitly refer to it, I believe that the better view is that it does apply.”
And at paragraph 28,
“In my view, it makes sense to take into account subparagraph 6(1)(b)(x) in applying subparagraph 6(1)(b)(v) of the ITA for the purposes of section 174 of the ETA. It results in a more harmonious application of those two Acts…”
The harmonious application he refers to concerns deductions under the ITA in calculating income and GST credits or rebates. In essence, the person claiming the income deduction for car expenses should also be the one who claims the GST credit or rebate. In this case, the sales reps would claim car expenses, since the allowance is included in income, and would claim a GST rebate since they paid GST on their car expenses. The employer is denied a GST ITC since both can’t claim a credit or rebate for the same amount.
While I agree with the conclusion, I cannot fully support the reasoning since some employees receiving a car allowance won’t be eligible to deduct car expenses under ITA section 8 nor claim a GST rebate while the employer would not, based on this case, be eligible for a GST ITC.
In my view, ETA 174(c) states, “…a reasonable allowance for the purposes of that subparagraph.” To be reasonable for the purposes of “that paragraph”, in this case subparagraph 6(1)(b)(v), one is restrained by the conditions of subparagraph 6(1)(b)(x) with the phrase, “and for the purposes of subparagraphs 6(1)(b)(v)…” An allowance is reasonable if and only if it satisfies the requirements of subparagraph 6(1)(b)(x).
[1] I-D Foods Corporation (IDF) is appealing an assessment issued by the Deputy Minister of Revenue of Quebec on behalf of the Commissioner of Revenue of Canada (Minister) pursuant to the Excise Tax Act, R.S.C. 1985, c. E‑15 (ETA). The relevant period is January 1, 2005 to December 31, 2007. By that assessment, the Minister disallowed input tax credits (ITCs) for the relevant period aggregating $126,338.98 in respect of car allowances paid by IDF to its employees for the use of their cars in the course of the performance of their employment duties. The relevant section is section 174 of the ETA, which refers to subparagraphs 6(1)(b)(v), (vi), (vii) and (vii.1) of the Income Tax Act, R.S.C. 1985 (5th supp.), c. 1 (ITA). In the end, the main issue raised by this appeal is more legal than factual and concerns the scope of the application of section 174 of the ETA. More specifically, the issue is whether subparagraph 6(1)(b)(x) of the ITA, as interpreted by the Federal Court of Appeal in Ville de Beauport v. Minister of National Revenue, 2001 FCA 198, [2002] 2 C.T.C. 161, must be taken into account in applying paragraph 174(c) of the ETA.
| Section 174—Travel and other allowances |
| Section 253—Employees and partners |
| 6(1)(b)—Personal or living expenses |
| 18(1)(r)—Certain automobile expenses |
| Cat Bros. Oilfield Construction Ltd. v. M.N.R. (2010 TCC 287) |
| Melville Motors Ltd. v. The Queen (2003 TCC 444) |
| Ville de Beauport v. Canada (MNR) (2001 FCA 198) |
[2] IDF has been carrying on a business of importing and distributing food products in Canada since 1948. Its annual sales approximated $85 million to $90 million per year during the relevant period. IDF had during that period approximately 80 employees (described as sales representatives) involved in distributing its products, and it paid their salaries every two weeks. According to the testimony of Mr. Domenic Nardolillo, his remuneration was in part fixed and in part based on the sales that he made. Besides the sales director, Mr. Nardolillo was the only sales representative to testify at the hearing. Each IDF sales representative was given an exclusive territory to service. The work was performed mostly on the road and involved visiting stores and collecting orders five days a week.
[3] The sales representatives had to use their own cars to carry out their duties, and IDF paid them a car allowance. According to Ms. Linda Ross, who was in charge of IDF’s payroll, this car allowance had three components: the cost of gas, the cost of insurance — up to a $1000 limit — as evidenced by an invoice, and the other costs for the car. IDF determined the amount of the allowance using its in‑depth knowledge of the number of kilometres to be travelled to cover a particular territory. According to Diane Dault, the person in charge of sales, who has been with the company for 29 years, the allowance is based on the kilometres having to be driven by a sales representative and on the sales target assigned to that sales representative. For instance, IDF took into account past experience with regard to that particular territory, for example, the number of kilometres driven in that territory in the preceding year. She also got daily and weekly sales reports in respect of each of her sales representatives, so she knew which clients had been visited in the territory.
[4] Once the estimate of the annual travelling costs for a particular territory was made, the total was divided by 26 and a flat-rate allowance was paid every two weeks along with the remuneration of the sales representatives. Certain sales representatives were allowed to use a company credit card to pay for their gas. However, the amount of such transactions was deducted from the car allowance (see Exhibit I-1, page 4.21). Furthermore, the flat-rate allowance paid biweekly could be adjusted every three months to take into account the actual cost of gas (see Exhibit I-1, page 4.20).
[7] Mr. Siino, an employee of the Minister who prepared the tables filed as Exhibits I-5 and I-6 and who wrote the portion entitled “Autres constatations” in the appeals officer’s report (Exhibit I-4), noted that some sales representatives had moreover received exactly the same car allowance, although they had not travelled the same number of kilometres.
[11] At the hearing and in IDF’s Notice of Appeal, IDF’s counsel as good as conceded that the car allowances were estimated.
[13] From this description, I conclude that IDF was paying an allowance which was based on an estimated number of kilometres to be travelled by a sales representative and not on the actual kilometres driven. The amount estimated represented in most cases a very good effort to fix a reasonable car allowance for the employees. However, the issue is whether that method meets the requirements of section 174 of the ETA. To paraphrase the argument made by IDF’s counsel, what must be determined is whether the estimate made by IDF of the kilometres to be travelled meets the requirements of section 174. More specifically, to use the wording of paragraph 174(c), the issue is whether the amount determined to be reasonable by the person (employer) can be considered reasonable for the purposes of subparagraph 6(1)(b)(v)[3] of the ITA.
[17] However, that view does not appear to be shared by IDF’s accountant, who maintained that the ITCs could be recovered by the sales representatives. This is what he wrote to Ms. Daviau on October 27, 2009 (Exhibit I-3) :
Furthermore, please note that deeming the automobile allowances unreasonable and therefore making them taxable would not benefit either the Minister or our client.
As clearly shown on the logs already submitted, the employees substantially use their automobiles for employment purposes and therefore would be entitled under section 63.1 of the Quebec Taxation Act to claim automobile expenses for the years in question.
This would result in having the Minister amend the 2005, 2006 and 2007 personal tax returns of all employees in order to allow employment expenses and GST/QST rebates.
Since there are approximately 110 employees that would be directly affected, the Minister would have to amend approximately 330 personal tax returns.
[18] The respondent’s counsel submits that the assessment should be confirmed because the allowances paid by IDF do not meet all the requirements of section 174 of the ETA. In order for an allowance to be reasonable for the purposes of paragraph 174(c), it is necessary that the measurement of the use of the vehicle be solely based on the number of kilometres for which the vehicle was used in connection with the employment, as required by subparagraph 6(1)(b)(x) of the ITA. In support of this position, counsel for the respondent relied on the decision Tri-Bec Inc. v. R., 2003 G.S.T.C. 75, 2003 G.T.C. 762, 2002 G.S.T.C. 27 (Fr.) at paragraph 19, where Judge Lamarre Proulx stated:
19 Subparagraph 6(1)(b)(x) of the Income Tax Act is clear in my view. Since section 174 of the Act refers to this statutory provision, a reasonable allowance for the use of a motor vehicle is one that is fixed on the basis of the number of kilometres travelled by the taxpayer in the performance of the office or employment.[5]
[19] In Beauport, where the application of subparagraph 6(1)(b)(x) of the ITA was considered, Justice Noël of the Federal Court of Appeal wrote, at paragraph 17:
17 In this instance, the scheme introduced by the applicant does not take into account the number of kilometres actually travelled by the employees during the period for which the allowances are paid but is based on an estimate determined by reference to the previous period. That is precisely the type of calculation that was excluded when subparagraph 6(1)(b)(x) was adopted and the Tax Court Judge's reading of that provision was in conformity with the statutory language and not incompatible in any way with the concept of an allowance.
[20] The relevant facts of that case are summarized at paragraph 5 of the reasons:
5 The evidence established that the applicant had introduced a "motor vehicle allowance policy" based on figures contained in a specialized publication prepared by the Quebec Automobile Club (CAA-Quebec). To calculate an amount per kilometre, the applicant together with the union tried to determine average operating costs that took into account fixed and variable costs for the use of a vehicle. It then applied that amount to a value representing the approximate annual kilometres driven that was extrapolated from the total kilometres actually driven by its employees during a three-month reference period.
[21] Here, as was done in Beauport , IDF determined the allowance on the basis of past experience. The measurement of the use of the vehicle was an estimated number of kilometres to be travelled in a particular territory. The allowance could be adjusted on a three-month basis to take into account the actual cost of gas. However, this adjustment could not, in my view, differentiate between use of the car for the performance of employment duties and use for personal purposes. Furthermore, at the end of the year, when the sales representatives reported the actual number of business kilometres for which they used their cars during the year, IDF did not adjust the allowance paid in the year. Here, the rate per kilometre which was determined by IDF’s accountant was useful to establish how reasonable the allowances paid were; however, the actual number of business kilometres travelled by a particular representative was not used in determining the actual allowance paid to the representative. Therefore, as I have concluded above, the allowances paid were based on an estimate of the kilometres to be travelled and not on the actual number of kilometres for which the vehicles were in fact used by the representatives in performing their duties during the relevant year.
[22] If the ITA were the only Act to be applied, the merit of IDF’s appeal would be easily determined, in light of the pronouncements of the Federal Court of appeal in Beauport, which confirmed the decision of Judge Dussault of this Court. However the issue to be determined is whether the car allowances paid to the representatives meet the requirements of paragraph 174 of the ETA. More particularly, it must be decided whether the determination made by IDF that it had paid a reasonable allowance is reasonable for the purposes of subparagraph 6(1)(b)(v) of the ITA.
[27] Although one could argue that subparagraph 6(1)(b)(x) of the ITA does not apply for the purposes of 174(c) of the ETA on the basis that paragraph 174(c) does not explicitly refer to it, I believe that the better view is that it does apply. Therefore, subparagraph 6(1)(b)(x) has to be taken into account to determine what constitutes a reasonable allowance for the purposes of subparagraph 6(1)(b)(v) of the ITA.
[28] In my view, it makes sense to take into account subparagraph 6(1)(b)(x) in applying subparagraph 6(1)(b)(v) of the ITA for the purposes of section 174 of the ETA. It results in a more harmonious application of those two Acts, which can be illustrated as follows in this particular case. Given that under the ITA, IDF sales representatives would have to include the car allowance in their income because it was not a reasonable one as a result of the application of subparagraph 6(1)(b)(x) of the ITA, IDF could deduct the allowance under paragraph 18(1)(r) of the ITA because it was included in the IDF representatives’ income from employment. Those representatives would normally deduct their car expenses under paragraph 8(1)(f) of the ITA[9] and claim the GST rebate under section 253 of the ETA. In that situation, the GST “credit” (i.e., ITC or rebate) is claimed by the person who deducts the car expenses. This is a logical result. Indeed, if one were to adopt the view taken by IDF, the odd result would be that IDF could claim the ITCs and the representatives could not, although they are the ones who would be deducting the car expenses. This would be so because IDF could not give the certification that is required by section 253 of the ETA in order for the representatives to be entitled to claim the GST rebate. The certification mechanism described in section 253 of the ETA prevents the employer and the employee from each getting ITCs and the rebate for the same expenses.
[29] Having concluded that the proper interpretation of paragraph 174(c) of the ETA requires that a determination of what constitutes a reasonable allowance under subparagraph 6(1)(b)(v) of the ITA must take into account the provisions of subparagraph 6(1)(b)(x) of the ITA as interpreted by the Federal Court of appeal in Beauport, and that the allowances paid by IDF were not determined by taking into account solely the number of kilometres for which the representatives used their cars, the inescapable consequence is, unfortunately for IDF, that the requirements of section 174 have not been met.
[30] For all of these reasons, the appeal by IDF is dismissed and costs are awarded to the respondent.
A paragraph beginning with a number in square brackets is a direct quote from the case.
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