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Ottawa, December 12, 1995
1995-105

Government Announces 1996 Automobile Expense Deduction Limits and Prescribed Rates for Automobile Operating Expense Benefits

David Walker, Parliamentary Secretary to the Minister of Finance, today announced that the tax-exempt kilometre allowance limit for income tax purposes will be increased by two cents per kilometre for 1996. Mr. Walker also announced a one-cent-per-kilometre increase in the prescribed rates for determining the employee benefit from the personal-use portion of operating expenses paid by employers in respect of automobiles provided to employees. The other automobile expense deduction limits relating to the capital cost of automobiles, leasing costs and interest costs will not be changed for 1996.

Therefore, the limits for 1996 are as follows:

• the limit for tax-exempt allowances paid by employers to employees will be increased from 31 cents to 33 cents for the first 5,000 kilometres driven, and from 25 cents to 27 cents per kilometre for each additional kilometre driven (except for the Yukon and Northwest Territories, where the tax-exempt allowance will be 37 cents for the first 5,000 kilometres driven, and 31 cents for each additional kilometre);

• the ceiling on the capital cost of passenger vehicles for Capital Cost Allowance (CCA) purposes will remain at $24,000, plus the applicable federal and provincial sales taxes;

• the limit on deductible leasing costs will remain at $650 per month, plus the applicable federal and provincial sales taxes; and

• the maximum allowable interest deduction in respect of amounts borrowed to purchase an automobile will remain at $300 per month.

The general prescribed rate used to determine the employee's benefit from the personal portion of operating expenses paid by employers in respect of automobiles provided to employees will be increased from 12 cents to 13 cents per kilometre. In the case of taxpayers employed principally in selling or leasing automobiles, the prescribed rate will also be increased by one cent, from nine cents to 10 cents per kilometre.

A backgrounder is attached.

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For further information:

Bob Morrison
Business Income Tax Division
Tax Policy
(613) 995-9920

Backgrounder

There are five limits or prescribed rates that regulate the deductibility of automobile expenses and the calculation of automobile-related taxable benefits in the Income Tax Act:

• the tax-exempt kilometre allowance limit;
• the capital cost ceiling;
• the interest expense limit;
• the leasing limit; and
• the rates used to determine the operating expense taxable benefit.

Each of these are described briefly below:

Tax-Exempt Kilometre Limit -- This limit restricts the amount that an employer can deduct for tax-free allowances paid to employees who use their personal vehicles for business purposes. The limit reflects the key cost components of owning and operating an automobile, such as depreciation, financing, and operating expenses (i.e., gas, maintenance, insurance and license fees). For 1996, the limit is increased by two cents a kilometre to 33 cents for the first 5,000 kilometres driven and 27 cents for each kilometre thereafter. The limits are four cents per kilometre higher in the Yukon and Northwest Territories to reflect the higher cost of maintaining and operating a vehicle in those regions.

The limits provide a system which is simple to administer for both businesses and their employees by permitting the deduction by businesses of reasonable reimbursement costs without requiring employees to include the amounts in income or to justify their actual automobile operating expenses. These rates do not limit the amount that employers can pay to employees who use their personal vehicles for business purposes. However, for employers to be able to deduct higher rates, the allowance must be judged reasonable by Revenue Canada and be included in the employee's income. In such circumstances, employees fulfilling certain conditions, such as those who are required to use a vehicle to accomplish their work (e.g., salespersons), could then claim the actual automobile expenses they incur.

Capital Cost Ceiling -- This limit restricts the cost of a vehicle on which Capital Cost Allowance (CCA) may be claimed. It reflects the cost of acquiring an automobile that is generally acceptable for business purposes. For 1996, the ceiling on the capital cost of passenger vehicles for CCA purposes will remain at $24,000, plus the applicable federal and provincial sales taxes.

Interest Expense Limit -- This limit restricts the deductibility of interest expenses on funds borrowed to finance the purchase of a vehicle. It reflects the reasonable cost of financing a vehicle that is generally acceptable for business purposes. For 1996 this limit will remain at $300 per month.

Leasing Limit -- The deductibility of automobile leasing costs is restricted to the lesser of:

• actual lease payments (adjusted downward if the manufacturer's list price of the automobile exceeds the capital cost ceiling); and
• a prescribed rate per month.

The prescribed rate per month reflects the cost of leasing a vehicle that is generally acceptable for business purposes. For 1996, this prescribed rate will remain at $650 plus the applicable federal and provincial sales taxes.

Prescribed Rates for the Automobile Operating Expense Benefit -- These are the rates used to determined the value of the benefit to the employee of having the personal portion of automobile operating expenses paid by the employer when a vehicle is provided to an employee. Employees must include this benefit as income in their tax returns. For 1996, the general prescribed rate will be increased by one cent per kilometre to 13 cents per kilometre of personal driving while, in the case of taxpayers employed principally in selling or leasing automobiles, the prescribed rate will be increased by one cent per kilometre to 10 cents per kilometre of personal driving.

These rates reflect only operating expenses and do not include depreciation and financing costs. The additional benefit of having an employer-owned vehicle available for personal use (i.e., the automobile standby charge) is calculated separately and is also included in the employee's income.