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Ottawa, December 23, 1996
1996-103
Finance Minister Announces 1997 Deduction Limits, Benefit Rates for Automobile Expenses
Related document:
Finance Minister Paul Martin today announced changes that will apply in 1997 to the automobile expense deduction limits and the prescribed rates for determining the taxable benefit on automobile operating expenses.
It is the policy of the government to review these rates and limits annually and to announce any changes prior to the end of the calendar year in order to provide certainty to businesses.
The changes are as follows:
- The limit for deductible tax-exempt allowances paid by employers to employees will be increased by two cents per kilometre to better reflect the actual cost of driving. The rates will increase from 33 cents to 35 cents for the first 5,000 kilometres and from 27 cents to 29 cents per kilometre for each additional kilometre (for the Yukon and Northwest Territories, the tax-exempt allowance will be 39 cents for the first 5,000 kilometres driven, and 33 cents for each additional kilometre). These rates will apply to driving which takes place after 1996.
- The limit on deductible leasing costs will decrease from $650 per month to $550 per month (plus the applicable federal and provincial sales taxes on such an amount), effective for leases entered into after 1996, to reflect the decline in interest rates.
- The maximum allowable interest deduction in respect of amounts borrowed to purchase an automobile will decrease from $300 per month to $250 per month to reflect the decline in interest rates.
- The general prescribed rate used to determine the taxable benefit relating to the personal portion of automobile operating expenses paid by employers will be increased by one cent, from 13 cents to 14 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 10 cents to 11 cents per kilometre.
The ceiling on the capital cost of passenger vehicles for Capital Cost Allowance (CCA) purposes will increase from $24,000 to $25,000, plus the applicable federal and provincial sales taxes on such an amount, to reflect the increase in new automobile prices.
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For further information:
Bob Morrison
Business Income Tax Division
Tax Policy Branch
(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. This 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 1997, the limit is increased by two cents per kilometre to 35 cents for the first 5,000 kilometres driven and 29 cent 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 limit provides a system which is simple to administer for both businesses and their employees by permitting the deduction by business of reasonable reimbursement costs without requiring the employees to include the amounts in income or justifying 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 1997, the ceiling on the capital cost of passenger vehicles for CCA purposes will increase by $1,000 to $25,000, 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 1997, this limit is reduced by $50 per month to $250 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 1997, this prescribed rate is reduced by $100 per month to $550 plus the applicable federal and provincial sales taxes.
Prescribed Rates for the Automobile Operating Expense Benefit -- These are the rates used to determine the value of the benefit received by 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 1997, the general prescribed rate is increased by one cent per kilometre to 14 cents per kilometre of personal driving while, in the case of taxpayers employed principally in selling or leasing automobiles, the prescribed rate is increased by one cent per kilometre to 11 cents per kilometre of personal driving.
These rates reflect operating expenses only 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.
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