Principal Issues: [TaxInterpretations translation] In the situation presented, with respect to the travel between the employees' places of residence and the worksites where they are assigned, should the allowances for the use of a motor vehicle that are paid to them be included in the calculation of their income? Will they be able to deduct the cost of a motor vehicle for that travel?
Position: Questions of fact. See our comments below.
Reasons: The Income Tax Act and previous positions.
XXXXXXXXXX 2010-038739
June 22, 2011
Dear Sir,
Subject: Travel allowance for construction industry employees in Quebec
This is in response to your letter of November 17, 2010 in which you requested our opinion as to the deductibility of travel expenses incurred by construction employees who must travel from their residence to the various worksites to which they are assigned.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you described the following situation:
- The employer operates in the construction industry. Its worksites are located in different regions of Quebec.
- Its employees are called to work on various projects and the duration of their stay on each worksite varies between a day and a few weeks.
- The worksites to which the employees are assigned do not represent the employer's place of business.
- The employees must travel by car from their place of residence to the worksite assigned to them.
- For such travel, the employees receive travel expense allowances. The amount of the allowance and the payment terms differ according to the type of construction, either heavy residential (type 1) or institutional and commercial (type 2).
- For type 1 construction, the employer pays employees an allowance of $XXXXXXXXXX per kilometer travelled in excess of XXXXXXXXXX kilometers.
- For type 2 construction, where the distance between the place of residence and the worksite is between XXXXXXXXXX and XXXXXXXXXX kilometers, the employer pays its employees an allowance of $XXXXXXXXXX. Where the distance between the two places is between XXXXXXXXXX and XXXXXXXXXX kilometers, the allowance paid by the employer is $XXXXXXXXXX.
- For both type 1 and type 2 construction, some employees, despite the fact that they are entitled to it, decide not to claim an allowance for travel expenses.
- When traveling between their residence and the worksite where they are posted, some employees must make a stop for personal reasons.
Respecting this scenario, you asked the following questions:
Respecting type 1 construction employees:
(1) For the purposes of subparagraph 6(1)(b)(vii.1), may they exclude from their income the allowance paid by the employer and claim a deduction for the portion of the travel expenses incurred and for which they are have received no allowance?
(2) Alternatively, could it be argued that the allowance paid by the employer is unreasonable because it does not cover all travel expenses of employees from their place of residence to the worksites?
With respect to type 2 construction employees:
(1) For the purposes of subparagraph 6(1)(b)(x), is the allowance paid by the employer an allowance solely based on the number of kilometers travelled by the employees in the course of their employment?
(2) If so, for the purposes of subparagraph 6(1)(b)(vii.1), is that allowance considered reasonable?
(3) Alternatively, could it be argued that the allowance paid by the employer is unreasonable because it does not cover all travel expenses of employees from their place of residence to worksites?
Respecting employees who do not claim an allowance:
(1) Could those employees claim a deduction in computing their income for all travel expenses incurred in the course of their employment?
(2) If not, could those employees claim the net amount of travel expenses incurred in the course of their employment, being the total amount of travel expenses incurred less the amount of the allowance that they could have claimed from the employer?
Finally, you wish our comments on employees who leave their place of residence, make a stop for personal reasons and then go to the worksite to which they have been assigned.
Our Comments
It appears to us that the situation described in your letter and hereinafter summarized could constitute an actual situation involving taxpayers. As explained in paragraph 22 of Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than through advance income tax rulings. 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 for their opinion. However, we are able to offer the following general comments that may be helpful to you.
Under paragraph 6(1)(b), any amount received by a taxpayer during the year as an allowance for personal or living expenses or as an allowance for any other purpose will be included in the calculation of the taxpayer's income, unless the allowance meets both of the following conditions:
- It is reasonable;
- It is received by the employee from the employee’s employer to travel in the performance of the duties of the employee’s office or employment.
Generally, and as set out in Interpretation Bulletin IT-63R5, Benefits, Including Standby Charge for an Automobile, from the Personal Use of a Motor Vehicle Supplied by an Employer - After 1992 (the "Bulletin"), the Canada Revenue Agency (the "CRA") is of the view that an employee's travel between the employee’s place of residence and the employee’s regular place of employment is of a personal nature and any allowance received in respect of the travel must be included in computing the employee's income. By contrast, where an employer requests an employee to travel from a place of residence to a place other than the employee’s regular place of employment, that travel is generally considered to take place in the course of the office or employment.
Paragraph 5 of the Bulletin indicates the following:
In addition to what would obviously be considered use of a motor vehicle supplied by an employer that is not in connection with or in the course of the taxpayer's office or employment, i.e., personal use (e.g., vacation trips, personal shopping trips, etc.), such use includes travel between the employee's place of employment and home, even though the employee may have to return to work after regular duty hours. An exception occurs, however, where (as required by the employer or with the employer's permission) the employee proceeds directly from home to a point of call other than the employer's place of business to which the employee reports regularly (e.g., to make repairs at customers' premises), or returns home from such a point. These particular trips are not considered to be of a personal nature.
As stated in paragraph 32(c) of Interpretation Bulletin IT-522R, the term "place of business" generally is considered to have reference to a permanent establishment of the employer such as an office, factory, warehouse, branch or store, or to a field office at a large construction job. That is usually the place where the employee has to report for work and receive instructions from the person in charge at the site.
Determining the regular place of employment of an employee is a question of fact. It is possible that the regular place of employment of an employee is not the place of business of the employer. In that case, the various worksites to which the employees are assigned do not represent the place of business of the employer. In the absence of additional information, we have assumed that the employer's place of business does not constitute the regular place of employment of the employees, who work only at the various worksites to which they are assigned. Thus, we are of the view that the travel between an employee's residence and the worksite to which the employee is assigned is of a personal nature.
Additionally, where an allowance is only paid for part of an employee's travel, the CRA is generally of the view that there are two trips, one covered by the allowance, the other that is not. In the case of Type 1 construction employees, the Employer will pay its employees an allowance of XXXXXXXXXX per kilometer travelled in excess of XXXXXXXXXX for travelling between the employee's place of residence and the worksite where the employee is assigned to work.
For the purposes of paragraph 6(1)(b), an allowance that covers the actual costs incurred by an employee who uses the employee’s motor vehicle in the course of the employee’s employment would generally be considered a reasonable allowance. While that is a determination of fact, in general, an employer may use the prescribed rates of section 7306 of the Income Tax Regulations. Depending on the particular circumstances of each case, a rate that differs from that in this section could also be considered reasonable.
For Type 1 construction employees, the allowance of $XXXXXXXXXX per kilometer will be included in computing the income of the recipient employees because it is paid for a trip that is personal in nature. However, those employees may claim a deduction under paragraph 8(1)(h.1) for the expenses incurred in respect of the portion of the trip to which the allowance relates. They may also claim a deduction under that paragraph for the portion of the trip less than XXXXXXXXXX kilometers, where the worksites do not represent the employer's place of business.
Under subparagraph 6(1)(b)(x), an allowance is deemed to be unreasonable to the extent that the use of the vehicle is not, for the purposes of the allowance, based solely on the number of kilometers travelled by the taxpayer in connection with or in the course of the office or employment.
Thus, for Type 2 construction employees, we are of the view that the allowance is not reasonable since it is not based solely on the number of kilometers travelled by employees in fulfilling the duties of their employment. Those employees could therefore deduct all expenses incurred to travel from their place of residence to the worksites to which they are assigned. In fact, for the portion of their travel exceeding XXXXXXXX, the allowance paid for the travel exceeding XXXXXXXXXX would be deemed not to be reasonable, whereas the portion of their travel that is less than XXXXXXXXXX would not entitle them to an allowance.
Furthermore, based on the facts you described above, it seems possible for both Type 1 and Type 2 construction employees to choose not to claim a travel allowance. You wish to know if this choice would allow them to deduct travel expenses incurred between their residence and the worksites where they are assigned.
An employee is entitled to a deduction under paragraph 8(1)(h.1) to the extent that the employee was required under the contract of employment to pay the travel expenses incurred by the taxpayer in the performance of the duties of the office or employment. We do not believe that an employee is required to pay those costs where it is possible for the employee to claim an allowance for the use of the motor vehicle. In our view, the decision whether or not to claim an allowance should not affect the employee's ability to deduct travel expenses. In this case, we remind you that, in our opinion, only Type 1 construction employees, for the portion of their trip that is in excess of XXXXXXXXXX kilometers, could not deduct travel expenses between their place of residence and the worksite to which they were assigned.
Finally, you wish to know how to qualify the journey of an employee who leaves the employee’s place of residence, makes a stop for personal reasons and then goes to the worksite to which the employee was assigned. For the purposes of the deduction in paragraph 8(1)(h.1), the distance travelled will be the distance between the place of residence and the worksite to which the employee is assigned. In other words, it will be necessary to exclude the travel around the stop that is made for personal use. Of course, if the employee receives an allowance that covers the travel respecting the personal stop, that allowance must also be included in the calculation of the employee's income.
We hope that these comments are of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate