Unreasonable allowances for vehicles and GST/HST conflicts

A few weeks ago someone called me about unreasonable km reimbursements.

The story was that employer was paying 40 cents per km and felt that this was reasonable. Therefore, if it's reasonable, the employee's wouldn't be able to claim expenses, it wouldn't be a taxable amount.

If the employees felt it was unreasonable, they could claim the expenses, against their actual costs pro-rata, but the question was what about GST/HST - if the employer has claimed the deemed ITC, can the employee claim the GST/HST Rebate on GST 370 on their T1.

Here's some useful information:

CRA's reasonable km reimbursements are currently set by the Finance Minister on December 28, 2012 at 54 cents for the first 5,000 km's and 48 cents after that,

and for those in the Yukon, NWT and Nunavut, 4 cents higher, 58 cents for the first 5,000 km's and 52 cents after that...

ITA 18(1)(r) certain automobile expenses

Reg 7306 the amount in respect of use of one or more automobiles for km's driven for the purpose of earning income

ITA 6(1)(b) Personal or living expenses, include all allowances in income except...note that vehicle reimbursements fall under several sections, as employees who sell or contract are treated differently, and again, that this has nothing to do with self-employment - those are completely different rules. Self-employed people can't claim km's tax free, they must claim expenses.

Excise Tax Act S. 174 Deemed ITC claim by employer - note four conditions - the last one is reasonability - so if the amount isn't reasonable, as in what if it's too low, can that be unreasonable, well, here's what the Memo says...

GST/HST Memoranda Series 9-3 Allowances

1. Paragraph 33 says that reasonability is on a case by case basis, based only on km's reimbursed, never on a payment that is either a combination or a flat amount
2. Paragraph 42 if allowance unreasonably high or low, provisions of S. 174 don't apply - employer can't claim the ITC
3. Paragraph 54: Taxable benefits

P-113R Whether an individaul can claim an employee/partner GST/HST rebate for auto expenses when individual received an allowance (claimed on GST 370)

Line 457 - explains GST 370 claims by employees

GST370 Area C - note the reference to reasonability - so if it's not reasonable, the employer has to sign, as in, if it's not reasonable, it must be included on your T4.

The question becomes, what if the employer thinks it's reasonable, but the employee doesn't?

Can the employer claim the deemed ITC, and the employee, can they claim the GST 370 if they say it's unreasonable? Well, they have to get the employer to sign off on the GST 370 and if the employer claimed the ITC, they aren't going to want to sign the GST 370 because they already claimed the ITC.

Note that the employer has to certify they didn't claim the ITC per S. 174 or the employee can't claim it. (in the box just below Area C on the GST370 form.