Principal Issues: Is a lodging allowance based on the distance or on a fixed daily amount, received by an employee who is a long-haul truck driver who does not pay for lodging because he sleeps in his truck, a reasonable and tax-free allowance under 6(1)(b)?
Position: It is a question of fact but the allowance is likely not reasonable.
Reasons: The reasonableness of an expense is determined on a case by cases basis.
Novembre 15, 2016
XXXXXXXXXX Central Administration Income Tax Rulings Directorate Isabelle Brulotte, CPA, CA
2015-057720
Allowances and employees of transport companies
Dear Madam,
This is in response to your e-mail of March 20, 2015 in which you requested our opinion on the tax treatment of an allowance for accommodation expenses received by an employee of a transportation business. We apologize for the delay in responding to your request.
Unless otherwise indicated, all statutory references herein are references to the provisions of the Income Tax Act (the "Act").
Given situation
You described a situation in which an employer, whose principal activity is the transportation of goods, pays its employees an allowance for accommodation expenses. The employee’s duties require travel outside the municipality or outside the metropolitan area, as the case may be, where the employer's place of business to which they ordinarily report for work is located where. The employees are responsible for their cargo, so that they sleep in the truck’s cab as a security measure. Therefore, no expenses are generally incurred by employees for accommodation. However, employees incur meal expenses when traveling, and are not reimbursed for the meal expenses they incur while traveling in their employer's truck.
You presented the following three scenarios:
(1) The employer pays an allowance for accommodation expenses of $0.04 per kilometer. The employee travels on average 100,000 km per year, resulting in an annual allowance of $4,000. The employer is able to demonstrate that the allowance is not excessive, as compared to what it would cost a person for accommodation on the trips taken. The employee spent nearly $8,000 for meals (about $40 per day) for 20 days per each month spent away (totalling 11 months). The employee has all the receipts to support the claim. The employee claims 80% of this amount since the employee qualifies as a long-haul driver.
(2) The employer pays an allowance for accommodation expenses of $75 per day spent away. The employer is able to demonstrate that the allowance is not excessive, as compared to what it would cost a person for accommodation on the trips taken. The employee travels on average 20 days per month, 11 months per year and therefore received an allowance of $16,500 for the year. The employee spent nearly $8,000 on meals for the same period. The employee has all the receipts to support the claim. The employee claims 80% of this amount since the employee qualifies as a long-haul driver.
(3) The employer offers its employees wages [“salaire”] equal to $0.40 per kilometer, without compensation for meals or accommodation, or wages of $0.36 per kilometer, plus $0.04 per kilometer as an allowance for accommodation expenses. Thus, some of the employees receive an allowance for accommodation expenses with lower wages, while the others receive higher wages without an allowance, but in both cases, the employees receive $0.40 per kilometer. The employees paid an average of $40 per day for their meals. They all have their receipts to support this claim. They claim 80% of this amount since they qualify as long-haul drivers.
Your questions
You wish to know if the allowance received in all three situations could be considered as reasonable and therefore not included in the computation of employment income under paragraph 6(1)(b). You also requested that we consider the Transport Baie-Comeau decision (footnote 1).
Our comments
The general rule
The general rule is that allowances that an employee has received are included in the employee’s employment income since they could represent another form of remuneration. The Tax Court of Canada in Strong (footnote 2) commented inter alia on the purpose of section 6 as follows:
"[...] The intention behind section 6 is to prevent excessive allowances that might amount to a tax-free and expense-free allowance."
We share that view of the court. We consider that employers and employees should bear in mind the purpose of section 6 when they submit that an allowance is reasonable in the circumstances.
There are a multitude of ways to remunerate employees and we cannot determine the true nature of the payments between the parties without taking into account the legal relationship between them. In Shell (footnote 3), the Supreme Court of Canada confirmed that in the absence of a specific provision of the Act to the contrary or a finding that they are a sham, the taxpayer’s legal relationships must be respected in tax matters. Thus the determination of the nature of the remuneration paid in the three scenarios presented is one of fact and law that must be resolved in accordance with the legal relationships and obligations established by the terms of the agreement between the employer and the employer.
In this regard, we are of the view that an allowance for accommodation expenses that is reasonable in the circumstances is generally not another form of remuneration for the employee and the exception under subparagraph 6(1)(b)(vii) could apply, where applicable.
The exception under subparagraph 6(1)(b)(vii)
An allowance that covers personal or living expenses is included in an employee's income for a taxation year under paragraph 6(1)(b) unless the employee is included in the listed exceptions under subparagraphs 6(1)(b)(i) to (xi). One such exception, subparagraph 6(1)(b)(vii), reads as follows:
[There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment such of the following amounts as are applicable:]
(b) all amounts received by the taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose, except [...]
(vii) reasonable allowances for travel expenses (other than allowances for the use of a motor vehicle) received by an employee … from the employer for travelling away from
(A) the municipality where the employer’s establishment at which the employee ordinarily worked or to which the employee ordinarily reported was located, and
(B) the metropolitan area, if there is one, where that establishment was located,
in the performance of the duties of the employee’s office or employment, …”
To be covered by this subparagraph, an allowance must be for travel expenses and be reasonable.
Travel expenses
The Act defines "personal or living expenses" in subsection 248(1). We are of the view that "personal or living expenses" generally includes "travel expenses", despite the fact that the term "travel expenses" is not specifically mentioned in this definition. In general, travel expenses include food, beverage and accommodation costs. In addition, the CRA is of the view that the costs of showers are also considered to be deductible as accommodation expenses where a transport employee sleeps in the cab of the truck rather than in a hotel.
The travel expense allowance
The term "allowance" is not defined in the Act. However, to reference the Gagnon decision (footnote 4), the Supreme Court of Canada defined an "allowance" for the purposes of paragraph 60 (b). In paragraph 21 of that judgment, the Court established three conditions:
"According to the definition in Pascoe, for a sum of money to be regarded as an "allowance" it must meet three conditions: (1) the amount must be limited and predetermined; (2) the amount must be paid to enable the recipient to discharge a certain type of expense; (3) the amount must be at the complete disposition of the recipient, who is not required to account for it to anyone."
In addition, the Federal Court of Appeal adopted these conditions in MacDonald (footnote 5) to define an "allowance" for the purposes of paragraph 6(1)(b):
“Nonetheless, following Ransom, Pascoe and Gagnon, the general principle defining an "allowance" for purposes of paragraph 6(1)(b) is composed of three elements. First, an allowance is an arbitrary amount in that it is a predetermined sum set without specific reference to any actual expense or cost. As I noted above, however, the amount of the allowance may be set through a process of projected or average expenses or costs. Second, paragraph 6(1)(b) encompasses allowances for personal or living expenses, or for any other purpose, so that an allowance will usually be for a specific purpose. Third, an allowance is in the discretion of the recipient in that the recipient need not account for the expenditure of the funds towards an actual expense or cost.”
Thus, in general, we consider an allowance as a limited and pre-determined amount that an employee receives, in addition to his or her salary or wages, to allow that employee to incur certain types of expenses without having to justify them.
The reasonableness of an allowance
The Act does not specify what constitutes a "reasonable allowance" for the purposes of section 6. Nor has the legislator provided a method of computing a reasonable allowance for accommodation expenses. The question of whether an allowance is reasonable is a fact which can only be resolved after an analysis of all the facts relevant to each situation.
However, in the case of 2747-7173 Québec Inc. (footnote 6), Judge Lamarre Proulx expressed the following opinion as to the reasonableness of an allowance for the purposes of subparagraph 6(1)(b)(vii):
"Even if this allocation was a travel allowance, I am of the view that it is unreasonable because it is calculated on criteria which, for the most part, have nothing to do with the cost of travel outside the place where the employer's place of business is located."
We are of the view that an allowance will not be considered reasonable if there is no correlation between the method used by the employer to determine the amount of allowance to be paid to employees, the type of expense covered by the allowance, and the amount of the projected expenditure that are the subject of the allowance.
In addition, the CRA's long standing policy (footnote 7) is that, in determining whether a travel allowance is reasonable, the employer should compare the reasonable costs for travel expenses that the employer would expect its employee to incur with the allowance it pays to the employee for the trip.
Consequently, we are of the view that an allowance for accommodation expenses calculated exclusively on the basis of distance, time or other criteria will not be considered reasonable if it does not represent an estimate of the cost of accommodation that may be incurred by the employee during the travel that generated entitlement to the allowance.
As well, an allowance that is too high or sufficient only to cover the expenses an employee is expected to incur in this situation is not reasonable. Thus, both the employer and the employee must retain the supporting documentation or other acceptable evidence that has been used to establish that the allowance is reasonable.
As part of a request for technical interpretation, the Tax Rulings Directorate does not rule on questions of fact. Consequently, we cannot give a definitive opinion on the three scenarios that you describe in your request. However, where an employee sleeps in the truck cab, it is unlikely that the allowances for accommodation expenses in the three scenarios provided will be considered reasonable for the purposes of paragraph 6(1)(b).
Factors to Consider
As noted above, the Act does not provide criteria for determining the reasonableness of an allowance. The following is a non-exhaustive list of factors that we consider valid in determining whether an allowance for accommodation expenses is reasonable under subparagraph 6(1)(b)(vii):
• the average cost of ordinary accommodation in the area where the employee is traveling;
• the availability of accommodations along the employee's itinerary;
• the availability to the employee of accommodation provided at no cost;
• the employee's constraints during travel (e.g., mechanical maintenance, cargo safety, etc.);
and
• the exchange rate (if the employee travels outside Canada).
We are aware that there may be other factors depending on the circumstances and that the weight to be given to each factor depends on the particular situation of each employee and the type of expense that the allowance is intended to defray. Furthermore, how the employee spends the allowance received is not necessarily a factor to consider in determining whether the allowance is reasonable.
The responsibilities of the employer
The employer is responsible for determining whether the allowance received by the employee is included in the employee's employment income. The amount to be included in employment income will be reported on the employee's T4 - Statement of Remuneration Paid, and will be used to determine the amount of source deductions, if any. The employer is also responsible for reporting and remitting the sums deducted. If the employer breaches these obligations, it may be required to pay interest. Depending on the circumstances, the employer may also be subject to penalties.
Transport Baie-Comeau Inc.
In Transport Baie-Comeau (footnote 8), the Court had to decide whether or not the corporation's expenses claimed as accommodation allowances constituted amounts paid for accommodation. According to the appellant, the employer had introduced a new way of remunerating employees to simplify management and reduce audit and control costs. Thus, the employer's expense for accommodation allowances paid to its employees constituted a fully deductible accommodation expense. The respondent, on the other hand, claimed that the description of the allowance was inadequate and the purpose of the description was to avoid the less favourable treatment for a meal allowance. The Court concluded that the allowance paid by the appellant to its employees satisfied the requirements to qualify as an allowance for accommodation expenses.
The issue in this case was not the reasonableness of the amount of allowances paid to each employee. Rather, it was the reasonableness of the nature of the allowance deducted by the employer that was dealt with by the Court. Thus, we are of the view that this case is not relevant in determining the reasonableness of the amount of an accommodation allowance for the purposes of paragraph 6(1)(b).
Given the question at issue in Transport Baie-Comeau, we have concluded that this decision has no impact on resolving the questions you put to us.
We trust that these comments will be of assistance.
Michel Lambert, CPA, CA, M. Fisc.
Manager
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to our system requirements, the footnotes contained in the original document are reproduced below:
1 Transport Baie-Comeau Inc. v. The Queen, 2006 TCC 108, 2006 DTC 2805 (Tax Court of Canada [general procedure]).
2 Strong v. The Queen, 2004 TCC 297, 2004 DTC 2853 (Tax Court of Canada [informal proceedings]), para. 13.
3 Shell Canada Ltd. v. The Queen, [1999] 3 SCC 622, 99 DTC 5682 (Supreme Court of Canada).
4 Gagnon v. The Queen, [1986] 1 SCR 264, 86 DTC 6179 (Supreme Court of Canada).
5 Canada v. MacDonald, 94 DTC 6262 (Federal Court of Appeal), paragraph 14.
6 2747-7173 Québec Inc. v. MNR, 2006 TCC 689 (Tax Court of Canada [Employment Insurance]), paragraph 23.
7 CANADA REVENUE AGENCY, T4130 Employers' Guide - Taxable Benefits and Allowances, 2015, Chapter 3, under «reasonable travel allowances ».
8 Supra, note 1.