Principal Issues: 1.) What is the meaning of the expression "representation or other special allowances" used in subparagraph 6(1)(b)(iii)?
2.) Whether amounts received by the taxpayer as Rent allowance, Utility allowance and Foreign service allowance are subject to paragraphs 6(1)(a) or 6(1)(b) ?
Position: 1.) General comments.
2.) The Rent allowance and the Utility allowance are reimbursements of which only a part of it is subject to paragraph 6(1)(a). The calculation of the taxable benefit should take in consideration the employee economic enrichment in comparison of his pre-assignment housing costs. The Foreign service allowance is subject to subparagraph 6(1)(b)(iii).
Reasons: The law.
September 30, 2011
XXXXXXXXXX Income Tax Rulings Directorate Technical Advisor Isabelle Landry XXXXXXXXXX Tax Services Office (450) 623-0193 XXXXXXXXXX 2011-039317
Representation or other special allowances - under subparagraph 6(1)(b)(iii)
This is in response to your request for a technical interpretation of January 18, 2011, regarding the characterization of certain allowances paid to a Canadian Forces employee ("Forces") under "representation or other special allowances" under subparagraph 6(1)(b)(iii) of the Income Tax Act.
After presenting a summary of the relevant facts submitted, a summary of the position of your tax services office ("TSO") and the statement of your questions, we will provide you with our comments. Please note that unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (RSC 1985, c.1 (5th Suppl.) as amended (the "Act"), effective as of the date hereof.
Summary of Relevant Facts Submitted
Our understanding of the relevant facts submitted can be summarized as follows:
1. Due to an assignment, an individual, a member of the Forces, moved to the United States in a particular year with his spouse to serve in the Forces.
2. Prior to that assignment, the individual was resident in Canada, specifically in the XXXXXXXXXX region.
3. By virtue of paragraph 250(1)(b), the individual is deemed to have been resident in Canada in the taxation years in which he lived in the United States since he was, during each of those years, a member of the Forces.
4. The individual's assignment in the United States was projected to be for a period of several years.
5. The individual did not maintain a place of residence in Canada while in the United States. As a result, he did not have to pay for any housing or residence in Canada.
6. In such a situation, the Forces pay to individuals, throughout their assignment, in accordance with the Foreign Services Instructions (“FSI”) provided for in Chapter 10 of the Compensation and Benefits Instructions ("CBI") developed by the Director General, Compensation and Benefits ("DGCB"), the following allowances:
- Rent allowance;
- Utility allowance;
- Foreign service allowance, consisting of a Foreign service premium ("FSP") and a Post specific allowance (“PSA”).
7. "Section 2 - General Provisions" of the FSIs provides in particular the following:
10.2.01 - Intent of Military Foreign Service Instructions
The intent of the allowances and benefits under the Military Foreign Service Instructions is to recognize and to facilitate a member's service outside Canada and to ensure that, as much as possible, members should be neither better nor worse off than their counterparts serving in Canada.
8. "Section 5 - Shelter and Related Provisions" of the FSIs sets out how to determine the Rent Allowance. We refer more specifically to the following clauses:
"10.5.02 - Intent
The intent of this section is to outline the allowances and benefits designed to ensure that, wherever possible and practicable and allowing for local conditions, a member can acquire suitable accommodation at the post for the member and the member's dependants that is generally comparable to but does not necessarily equal to the size and nature of the accommodation the member would have obtained in Canada and that a member is only responsible for one set of accommodation and utility expenses during the member's deployment or assignment.
(...)
10.5.09 - Rent Allowance
10.5.09(1) (Maximum rent allowance) Rent allowance is paid to a member when the actual rent exceeds the member's rent share and must be within the member's rent ceiling for the post as established under CBI 10.5.08 - Rent Ceiling.
(...)
10.5.09(7) (Monthly amount) The rent allowance is a fixed monthly amount for the duration of the lease payable as follows:
- if the actual monthly rent does not exceed the member's rent ceiling, the actual monthly rent is the member's rent allowance; and
- if the actual monthly rent is greater than the member's rent ceiling, the rent ceiling is the member's rent allowance.
(...)
10.5.10 - Rent Share
10.5.10(1) (Rent share) Subject to CBI 10.5.11 - Waiver of Rent Share, a member to whom this section applies pays a rent share for the accommodation the member occupies or rents.
10.5.10(2) (Amount of rent share) A member pays a monthly rent share based on their pay level and the number of occupants in the member's household when the member signs the lease or occupies the Crown-held accommodation, as follows: (...) "
9. In addition, the FSIs provide the following terms and conditions for the purposes of determining the Rent Allowance:
- Ability of the member to choose not to be part of the program (CBI 10.5.04 (03) - Options available);
- Reduction of compensation where a third party pays a fee or sublet to the member (CBI 10.5.05 (12) - Remuneration paid by third party and CBI 10.5.09 (12) - Subletting accommodation);
- Increase in compensation based on rent increase pursuant to an escalation clause (CBI 10.5.09 (9) - Escalation clause);
- Determination of the amount of the rent share based on pre-determined schedules with annual adjustments based on the most recent Consumer Price Index of the annual movement for rent of accommodation as determined by Statistics Canada (CBI sub-section 10.5.10 - Rent Share);
- Ability to waive the payment of rent share where the member continues to be financially responsible for accommodation at their previous place of duty subject to prescribed terms and conditions (CBI Subsection 10.5.11 - Waiver of rent share).
10. In the particular situation, the individual pays a monthly rent of $XXXXXXXXXX in the United States and is required to pay a rent share in the amount of $XXXXXXXXXX per month in accordance with CBI 10.5.10. Consequently, he receives a net rent allowance in the amount of $XXXXXXXXXX.
11. You submitted that the individual would have to pay $XXXXXXXXXX for monthly rental accommodation in the XXXXXXXXXX region for comparable accommodation to that available abroad. However, no authority supporting this evaluation has been submitted to us.
12. "Section 5 – Shelter and Related Provisions" of the DSMEs establishes the terms and conditions for determining the Utility Allowance. We refer more specifically to the following clauses:
"10.5.14 - Utility Allowance
(...)
10.5.14(3) (Amount of Utility allowance) A member who is entitled to a utility allowance must submit a request to the AA:
- with an estimate of the applicable charges in paragraph (4); or
- allow the AA to calculate an estimate of the applicable charges in paragraph (4).
10.5.14(4) (Utility charges) The charges that may be included in the estimates referred to in paragraph (3) are the following:
- rental and repair charges for meters;
- water charges;
- gas charges;
- the cost of fuel used for heating, including cost of firewood if it:
- is the primary source of heat,
- is an essential source of heat to supplement an inadequate heating system, or
- is used in fuel-efficient fireplaces designed to reduce energy consumption;
- the charge of fuel used for cooking;
- electricity charges;
- sewage charges, including the emptying of septic tanks;
- garbage collection charges, including garbage bags, tags or containers required by the local government;
- charges or taxes for municipal services such as fire protection, police protection, street cleaning, mail delivery, street lighting and snow removal, when not included in the leasing agreement as part of rent;
- pest control charges if required by law or those that would be the responsibility of the landlord in Canada or appropriate local authority such as the municipal health or sanitation department in Canada;
- license fees and related taxes imposed by the host government for one television set, one car radio and one radio in the accommodation;
- any sales or excise tax on the related bills for the items listed above; and
m. if the local water is not potable, charges for bottled water as follows:
- 9 litres per day per person 12 years of age or over, and
- 5 litres per day per person under 12 years of age.
(...)
10.5.14(8) (Reconciliation) Annually, or when entitlement to the utility allowance ceases, the member will advise the AA of the actual charges of utilities for reconciliation purposes and applicable adjustments.
13. In addition, the DSMEs provide the following terms and conditions for the purposes of establishing the Utility Allowance:
- Ability for the member to choose not to be part of the program (CBI 10.5.13(1)(b) - Utility Share);
- Enumeration of Included and Excluded Costs for the Purpose of the Program (CBI 10.5.14 (4) - Utility charges, CBI 10.5.14 (5) - Member's Responsibility CBI 10.5.14 (6) – Swimming pool and CBI 10.5. 14 (7) - Other expenses)
- Determination of the share of utilities based on pre-determined schedules with annual adjustments based on the most recent Consumer Price Index for the annual change for utilities as determined by Statistics Canada (CBI 10.5.13 (2) – Amount of utility share and CBI 10.5.13 (3) - Annual adjustments);
- Potential exemption from payment of the utility share where the member continues to be financially responsible for utilities at the previous place of duty under prescribed terms and conditions (CBI 10.5.13 (1)(a) - Utility share and CBI 10.5.13 (6) - Waiver of utility share.
14. In the submitted situation, the individual pays a utility fee of $XXXXXXXXXX per month in the U.S. and pays a utility share of $XXXXXXXXXX per month in accordance with Article 10.5. 13 CBI. Consequently, he receives a net Utility allowance of $XXXXXXXXXX to $XXXXXXXXXX.
15. "Section 14 - Foreign Service Allowances" of the DSMEs sets out the procedures for determining the Foreign Service Allowance. We refer more specifically to the following clauses:
"Section 14 – Foreign Service Allowance
10.14.01 - General Provisions
10.14.01(1) (Allowances) The Foreign Service Allowances consist of the following allowances:
- the Foreign Service Premium; and
- the Post Specific Allowance.
10.14.01(2) (Remuneration paid by third party) If a third party pays remuneration to a member, the benefits and allowances to which the member is entitled under this section are reduced in accordance with CBI 10.2.11 - Remuneration Paid by a Third Party.
10.14.02 - Foreign Service Premium
10.14.02(1) (Intent) The Foreign Service Premium (FSP) is an allowance payable to a member:
- in recognition of foreign service and, as such, recognizes that there are disutilities and disincentives, some of which may be financial, resulting from service outside Canada; and
- to cover expenses not specifically covered by other allowances and benefits.
10.14.02(2) (Eligible members) This instruction applies to a member who is on assignment.
(...)
10.14.03 - Post Specific Allowance
10.14.03(1) (Intent) The intent of Post Specific Allowance (PSA) is to assist a member in travelling from the post.
10.14.03(2) (Eligible members) This instruction applies to a member who is deployed or assigned:
- on a posting for 12 months or more;
- on a posting for a continuous period greater than seven months but less than 12 months;
- on an attached posting, and as a result of an extension of the tour expiry date, will be at the post for a continuous period greater than seven months.
16. In addition, the DSMEs provide the following terms and conditions for the purposes of determining the Foreign Service Premium:
- Determination of FSP and PSA amounts according to pre-determined schedules with annual adjustments (CBI Subsection 10.14.02 and Subsection 10.14.03);
- Ability to suspend FSP payments after seven consecutive years at the same post (CBI 10.14.02 (11) - Year after the position).
17. According to the facts submitted, the individual benefits from a monthly Foreign Service Allowance of $XXXXXXXXXX, but no details were provided regarding the share attributable to the FSP and PSA.
This summary of facts is based on the information you provided to us, including a telephone conversation between you and the assigned officer on April 18, 2011. We refer you to your request for technical interpretation to complete this summary of the facts. In addition, we note that you have not provided us with any representation from the taxpayer or the Forces on any of the topics covered in this letter. Finally, it should be noted that, for the purposes of this section, we have consulted the DSMEs provided for in Chapter 10 of the CBIs as currently published and available on the website of the Department of National Defence and the Canadian Armed Forces at the following internet address: http://www.cmp-cpm.forces.gc.ca/dgcb-dgras/pub/cbi-dra/10-eng.asp.
Summary of the TSO Position
With respect to the Rent Allowance, you referred to Technical Interpretation 2005-0158871E5 which, in your opinion, indicates that a special allowance for purposes of subparagraph 6(1)(b)(iii) is only the portion of the allowance received to cover additional employment expenses incurred abroad.
Consequently, since in your opinion the individual would have had to pay $XXXXXXXXXX per month in order to rent accommodation in the XXXXXXXXXX region that was comparable to that available abroad, you are of the opinion that the amount of $XXXXXXXXXX per month for the period in which he received a Rent Allowance must be included in the individual's employment income as a benefit. That monthly benefit amount is the amount of $XXXXXXXXXX per month that the individual would have paid for a comparable rent in the XXXXXXXXXX region less the rent share of $XXXXXXXXXX per month that he reimbursed to his employer. You are of the view that the amount of rent to be reimbursed has not been sufficiently indexed by the employer in past years and that, due to this lack of indexation, there is a benefit that is received by the employee in this situation.
With respect to the Utility Allowance, you are of the opinion that the individual did not receive any benefits from his employment because of his participation in the utility compensation program because the electricity and heating costs are much higher in the country where he was assigned than they are in the XXXXXXXXXX region. However no authority in support of this position has been submitted to us.
And finally, regarding the Foreign Service Allowance, you plan to include in the individual's employment income a benefit of $XXXXXXXXXX per month for the period during which he received a Foreign Service Allowance. Your position is based on the fact that the benefits paid do not reimburse for any additional expenses actually incurred by the individual abroad, such as communication costs, the cost of airline tickets to visit family residing in Canada, and education expenses of the children. In such case, you submit that the cost of general expenses (such as food, vehicle rental, gasoline and other expenses) that the individual has assumed is equivalent to, and sometimes less, than the cost of the corresponding expenses that he would have incurred in Canada. However, no reference corroborating this statement has been submitted to us.
Questions
1.) What is the meaning of "representation or other special allowances” in subparagraph 6(1)(b)(iii)?
2.) What is the appropriate tax treatment of the benefits received by the individual as Rent Allowance, Utility Allowance and Foreign Service Allowance?
Comments
Question 1
Subparagraph 6(1)(b)(iii) provides that an allowance is not to be included as income from an office or employment if it is a "representation or other special allowances” received in respect of a period of absence from Canada as a person described in paragraph 250(1)(b), (c), (d) or (d.1).
Eligibility for this exemption implies that the payment first qualified as an allowance. To that end, the following general criteria are recognized by the consistent jurisprudence:
1. the amount must be fixed and determined in advance arbitrarily, without reference to specific expenses;
2. the amount must be paid to enable the beneficiary to take on certain types of expenses;
3. that amount must be under the control and at the full disposal of its beneficiary, without the beneficiary being accountable to anyone.
In that regard, the word "allowance" was commented upon as follows in Ransom (footnote 1):
"An allowance is quite a different thing from reimbursement. It is, as already mentioned, an arbitrary amount usually paid in lieu of reimbursement. It is paid to the employee to use as he wishes without being required to account for its expenditure. For that reason it is possible to use it as a concealed increase in remuneration and that is why, I assume, "allowances" are taxed as though they were remuneration."
In addition, the exemption in subparagraph 6(1)(b)(iii) requires the allowance to be a "representation or other special allowance". That expression is not defined in the Act and, to our knowledge, has not yet been commented on by the various Canadian courts dealing with tax matters. It is also not used in the CBI, nor in its enabling legislation, the Financial Administration Act (RSC, 1985, c. F-11).
Furthermore, the exemption applies in circumstances where an allowance is received in respect of a period of absence from Canada as a person described in paragraph 250(1)(b), (c), (d) or (d.1). We are of the view that the exemption in subparagraph 6(1)(b)(iii) must be interpreted with regard to this latter condition. Thus, an allowance that may be paid to employees posted abroad and to employees assigned to duties in Canada could not be exempted under subparagraph 6(1)(b)(iii).
In short, in response to your question, we reiterate the position stated in Technical Interpretation 2005-0158871E5, issued on March 7, 2007, to which you appropriately referred in your opinion request. That technical interpretation states the following:
"Since the terms "representation allowance" and "special allowance" are not defined in the Act, reference must be made to their ordinary meaning. We are of the view that a "representation allowance" in the context of subparagraph 6(1)(b)(iii) of the Act, is an allowance paid to a worker having to work outside the country and is intended to lessen the inconveniences arising out of having to move abroad, being subject to different living conditions and, where applicable, having to face a higher cost of living. Amounts that would generally qualify as "special allowances" are those where an employee is transferred or assigned outside of Canada and, as a result, incurs additional expenses. They are allowances designed to compensate, not reimburse, a loss or an additional expense arising out of the employment outside Canada. The employer would provide for the payment of such an allowance to meet, in whole or in part, the additional cost of the employee's expenses in respect of accommodation, food, travel, etc."
Question 2
Regarding the tax treatment of the various allowances received by the individual in the situation submitted, we first set out the general principles to govern the analysis, in order to then discuss the treatment of each of the allowances.
The tax treatment of an allowance depends on the nature of the amount received by the individual. When the allowance qualifies as an "allowance", paragraph 6(1)(b) generally provides that the amount must be included in the income from an office or employment of the individual who receives it, subject to the application of certain specific exemptions including subparagraph 6(1)(b)(iii).
Furthermore, in the case where the payment made corresponds to a total or partial reimbursement of an expense, the amount is not then an "allowance" and it is paragraph 6(1)(a) that may be applicable. It is considered to be a reimbursement and not an allowance where, in particular, the program put in place by the employer requires proof that the expense was incurred in order to generate entitlement to the payment. In these circumstances, a connection necessarily exists between the expense incurred directly or indirectly by the employee and the amount paid by the employer. Paragraph 6(1)(a) provides in part that the value of housing and any other benefits received by an individual by virtue of an office or employment shall be included in computing the individual’s income from an office or employment of a taxpayer, subject to the application of any exemption described in that provision. To determine whether a refund is a benefit or not, it must be determined whether the employee was enriched economically or whether the benefit was intended to return the employee to the employee’s former economic position. A reimbursement of personal expenses incurred in connection with the employment of an employee would not generally be covered by 6(1)(a) because the employee would not have been economically enriched.
In this situation, the Rent Allowance does not meet the general criteria recognized by the jurisprudence, since the maximum amount of the Rent Allowance is determined in particular by the rent actually paid in the United States by the individual. Consequently, we are of the view that the Rent Allowance is a program for the reimbursement of all or part of expenses that are generally taxable under paragraph 6(1)(a).
We are generally of the view that an employee does not become economically enriched where the employee’s employer reimburses the employee, on a temporary posting, for the higher cost of housing comparable relative to what the employee occupied in the employee’s region of origin before assignment ("Comparable Housing"). However, there may be situations where an employee occupies a higher class of accommodation during the employee’s assignment than Comparable Housing, for example, due to the employee’s level of security and location in the city. In those situations, the employee’s employer pays the employee more than the cost of Comparable Housing. In those situations, we are of the view that the employee has not been economically enriched if it is the employer who requires the taxpayer to occupy that housing of a higher class.
In this file, it appears that only a portion of the Rent Allowance received should be included in the individual's income by virtue of paragraph 6(1)(a). Indeed, the facts submitted in this situation suggest that a portion of the reimbursement received by the individual for his rent in the United States corresponds to what he had been paying for Comparable Housing. We are of the view that that portion of the reimbursement compensating him for an amount he had been paying for Comparable Housing generates economic enrichment. Consequently, we are of the view that only the excess of the amount that the individual would have had to pay in the XXXXXXXXXX region for Comparable Housing over the amount by which he was reimbursing his employer ($XXXXXXXXXX) is a benefit that the employee is required to include in income under paragraph 6(1)(a). The determination of the value of Comparable Housing is a question of fact and valuation on which our Directorate cannot pronounce. We are of the view, however, that it must be determined in a reasonable manner on a case-by-case basis. For example, we are of the view that a reasonable estimate of the value of Comparable Housing could be made from data provided by an organization such as Statistics Canada for the geographic area in question.
With respect to the portion of the Rent Allowance amount that exceeds the amount that the individual would have had to pay for Comparable Housing, we are of the view that this is a reimbursement of an expense incurred by the individual in respect of fulfilling of the duties of employment and that such reimbursement of expenses does not come within paragraph 6(1)(a). That amount is in fact paid to compensate the employee for an expense that the employee would not have had to incur elsewhere. There is therefore no economic enrichment of the individual with respect to that portion of the Rent Allowance unless the individual occupies a higher class of housing without the employer's requiring it.
The same reasoning applies to the Utility Allowance. We therefore consider that the Utility Allowance is also a program for the full or partial reimbursement of expenses. We also consider that only the portion of the Utility Allowance corresponding to the excess of the amount that the individual would have had to pay for the same utilities in the XXXXXXXXXX region over the amount reimbursed to the individual’s employer is a benefit that the employee is required to include in income under paragraph 6(1)(a).
Finally, with respect to the Foreign Service Allowance, which according to the CBI covers expenses that are not specifically covered by other allowances and benefits, we are of the view that this is an allowance, which, in addition, qualifies as a "representation or other special allowance" under subparagraph 6(1)(b)(iii). Thus, in our opinion, the allowance received by the individual should not be included in his employment income as a taxable benefit or allowance. That conclusion is based on the analysis of the CBI for the purposes of this letter and the facts as submitted to us.
We hope that these comments will be of assistance.
Best regards,
Guy Goulet CA M.Fisc.
Manager
for the Director
Ontario Business Income Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Ransom (67 DTC 5235, Ex. Ct)