9 May 2011 External T.I. 2010-0384711E5 F - Avantages imposables
Principal Issues: [TaxInterpretations translation] Are the different amounts received by the listed employees to be included in income? In the event that certain amounts are taxable, would the employee be entitled to a deduction from the employee’s employment income? Finally, what are the tax implications of spreading income evenly over a season?
Position: Question of fact; Position applied to all employees in general
Reasons: In order to determine whether the conditions for the application of the provisions that exclude the amount of the allowances from the calculation of income are satisfied, it is necessary to examine the facts specific to each particular situation.
XXXXXXXXXX 2010-038471
Anne Dagenais
Advocate, M. Fisc. B.A.A.
May 9, 2011
Dear Madam,
Subject: Allowances paid to employees
This is in response to your letter of October 21, 2010 in which you asked for our opinion regarding the tax treatment of certain amounts paid to employees in the forestry sector.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the “Act").
Specifically, you described a situation where an employer offers seasonal jobs that usually run from May to October of the same year. The employer hires foremen and contract workers.
Foremen are paid at an hourly rate. The employer also pays them an allowance of $XXXXXXXX per kilometer for the use of a motor vehicle belonging to them. For that purpose, the foremen must keep a daily record of their travel and submit an expense report in which they make a claim every week. The employer also pays a fixed allowance of $XXXXXXXX per day for the use of an all-terrain vehicle ("ATV") owned by a foreman. Travel, both by motor vehicle and via ATV, is considered work-related travel.
As for contract workers, according to criteria specific to the field of employment, the amounts paid by the employer are distributed as follows: 94% of the amount paid represents salary, 6% of the amount paid is used to pay for gasoline and oil expenses for the employee-owned tree trimmer and an additional $5 per hectare is paid for safety equipment (boots, helmets, protective trousers and protective glasses and ear muffs) that the employee must procure.
The agreement between the contract workers and their employer provides the opportunity to pay a portion of the salary as an allowance for the use of a motor vehicle and/or an ATV owned by the employee. For the use of the motor vehicle, the employer may reimburse pursuant to this agreement a fixed allowance of $XXXXXXXX per day (which corresponds to a maximum of XXXXXXXXXX km at $XXXXXXXXXX/km). For travel made by motor vehicle, no record is kept but, according to experience, all workers travel more than XXXXXXXXXX km per day and the daily mileage can be checked by foremen. For employee-owned ATV use, the employer may also pay a fixed allowance of $XXXXXXXXXX per day.
Finally, for contract workers, following another agreement with the employer, it is also possible to spread earnings over the work season to equalize weekly earnings.
You wish to know if the different amounts received by foremen and contract workers should be included in computing their income. In the event that certain amounts are taxable, you wish to know if those employees would be entitled to a deduction of those amounts from their employment income.
Finally, you wish to know the tax implications of income averaging over a season.
Our Comments
It appears to us that the situation described in your letter and summarized above could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documents to the appropriate tax services office ("TSO") for its opinion. However, we are able to offer the following general comments that may be helpful to you.
Paragraph 6(1)(a) provides that the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, is to be included in computing the taxpayer’s income. Paragraph 6(1)(b) provides that allowances received in the course of employment are taxable unless one of the exceptions in subparagraphs 6(1)(b)(i) to (ix) applies.
The tax treatment of the amounts received will depend, among other things, on the qualification of the amount as a reimbursement or as an allowance.
Under paragraph 40 of Interpretation Bulletin IT-522R, Vehicle, Travel and Sales Expenses of Employees, the word "allowance" means any periodic or other payment that an employee receives from an employer, in addition to salary or wages, without having to account for its use. It may be computed by reference to distance or time (for example, a "motor vehicle" expense allowance based on the distance driven or a travel expense allowance based on the number of days away) or on some other basis. In addition, an amount based on an estimate of potential costs represents an allowance and not a reimbursement. The same applies to an amount paid according to a rate at the time of use. On the other hand, if the employer makes a payment to an employee based on receipts or vouchers provided by the employee, that would be a reimbursement.
Allowance for the use of a motor vehicle
A reasonable allowance for the use of a motor vehicle received by an employee from the employer for travelling in the performance of the duties of the office or employment is not generally taxable pursuant to subparagraph 6(1)(b)(vii.1). However, subparagraphs 6(1)(b)(x) and (xi) provide that such an allowance is deemed to be unreasonable in the following circumstances:
(x) where the measurement of the use of the vehicle for the purpose of the allowance is not based solely on the number of kilometres for which the vehicle is used in connection with or in the course of the office or employment, or
(xi) where the taxpayer both receives an allowance in respect of that use and is reimbursed in whole or in part for expenses in respect of that use (except where the reimbursement is in respect of supplementary business insurance or toll or ferry charges and the amount of the allowance was determined without reference to those reimbursed expenses);
Where an allowance for travel expenses is considered reasonable for the purposes of subsection 6(1)(b), no amount is deductible by virtue of paragraphs 8(1)(h), (h.1) and (j).
The determination of whether an employer's allowance is taxable or not is a question of fact that must be analyzed according to the facts of each particular situation.
Although the tax treatment of an amount received can only be determined after an analysis of all the relevant circumstances and facts, it is our opinion that the allowance of $XXXXXXXX per day paid to an employee for the use of the employee’s vehicle should be included in the employee’s income pursuant to paragraph 6(1)(b) since the exemption in subparagraph 6(1)(b)(vii.1) would not apply . That allowance would be deemed to be unreasonable by virtue of the application of subparagraph 6(1)(b)(x) since it is not calculated solely on the basis of the number of kilometers traveled by the employee in the performance of the duties of the office or employment. Furthermore, we are of the view that the allowance paid to the foreman who receives an allowance for the use of the foreman’s motor vehicle, calculated at the rate of XXXXXXXXXX for the kilometers traveled in the performance of the duties of the employment, satisfies the exception provided for in subparagraph 6(1)(b)(vii.1). As a result, that allowance would not be taxable subject, of course, to the fact that the travel is not personal in nature.
We are of the view that if an employee receives a taxable allowance for motor vehicle expenses, paragraph 8(1)(h.1) could allow the deduction of some of the expenses of a motor vehicle for the performance of employment duties, if the conditions stated in paragraph 8(1)(h.1) are satisfied.
Allowance for the use of an ATV
Those allowances shall be included in computing the employees' income under paragraph 6(1)(b) unless one of the exceptions - including that provided for in subparagraph 6(1)(b)(vii) - applies.
Paragraph 6(1)(b)(vii) generally excludes reasonable allowances for travel expenses (for example, meals, hotels) received by an employee from the employer for travelling away from the municipality where the employer’s establishment at which the employee ordinarily worked or to which the employee ordinarily reported was located in the metropolitan area where that establishment was located.
It is difficult for us to comment on the situation you submitted to us since we do not have all the relevant facts. However, we are of the view that in the absence of additional elements, that allowance should be added to the employee's income from an office or employment under paragraph 6(1)(b) since we are of the view that the ATV allowance does not satisfy the requirements of subparagraph 6(1)(b)(vii). We believe that that subparagraph refers to a travel allowance for travel outside the municipality where the employer’s establishment at which the employee ordinarily worked or to which the employee ordinarily reported is located.
In our view, there is no other provision in section 8 that would allow the deduction, in whole or in part, of the expenses in the situation as you presented it.
Allowance for expenses related to a tree trimmer
We are of the view that the allowances paid as expense allowances to reimburse the gasoline and oil expenses for the employee's tree trimmer and calculated at a rate of 6% of the contracted price in accordance with the industry practice, are taxable allowances that the employee must include in income under paragraph 6(1)(b). In addition, this is consistent with our position in T4130, Employers' Guide - Taxable Benefits and Allowances ("Guide T4130").
Allowance for safety equipment
We are of the view that the $5 per hectare compensation for an annual total of approximately $150 to $250 paid to employees in respect of safety equipment is a taxable allowance to be included in computing the income of the employees under paragraph 6(1)(b). However, consistent with our position in Guide T4130, we are of the view that a reasonable allowance paid by the employer for the cost of protective clothing that an employee purchased without having to justify purchase by a receipt is non-taxable if all of the following conditions are satisfied:
(i) the law requires the wearing of protective clothing on the site;
(ii) the employee purchased the protective clothing;
(iii) the amount of the reimbursement is reasonable.
Income spread over the work season
Subsection 5(1) provides that generally, a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration received by the taxpayer in the year.
Paragraph 153(1)(a) requires any person who pays salary, wages or other remuneration to withhold the amount determined in accordance with prescribed rules in respect of the recipient's tax for the year. Part I of the Income Tax Regulations consolidates the rules governing withholding taxes deducted by an employer on amounts paid to an employee.
With respect to any mechanism or plan, in order for the definition of a salary deferral agreement under subsection 248(1) to apply, the creation or existence of the right for a person to receive an amount after the end of the year must have as one of the main purposes to postpone tax otherwise payable. Based on the facts you have given us, there would be no salary deferral agreement in this case. Thus, the employer has the obligation to make the appropriate source deductions on amounts paid to employees, both those paid weekly and those reported.
These comments do not constitute an advance income tax ruling and are not binding on the CRA with respect to a particular factual situation.
We hope that these comments are of assistance and answer your questions.
Best regards,
François Bordeleau, Advocate
Manger
Business and Partnerships Section
Income Tax Rulings Directorate