Principal Issues: [TaxInterpretations translation] What is the treatment of the following items for employees who travel in the performance of their duties:
(1) Living expenses allowances based on rates established by the Treasury Board Secretariat;
(2) An overnight separation allowance of $35 per night;
(3) A weekend premium of $100 per day for an employee who is on standby outside the region during a weekend;
(4) Travel time allowances for hourly employees;
(5) Reimbursement for lodging expenses incurred by employees who are traveling in the performance of their duties.
Position: (1) Not taxable.
(2) To be included in the employee's income as a personal and living expense allowance.
(3) See item 2 above.
(4) To be included in income from an office or employment.
(5) An expense reimbursement is not taxable unless it is paid for the employee's personal expenses.
Reasons: The Income Tax Act.
XXXXXXXXXX 2006-018548
May 31, 2006
Dear Madam,
Subject: Request for Technical Interpretation - Reimbursement of Expenses and Allowances Paid to Employees
This is further to your fax dated May 10, 2006, requesting a technical interpretation on the tax treatment of expense reimbursements and allowances paid to employees for travel undertaken in the course of their employment.
RELEVANT FACTS
Your fax states the following facts:
- Your company offers an experienced and specialized technical team in the XXXXXXXXXX;
- As part of their employment, your employees are frequently required to travel both out of the region - your company is located in the city of XXXXXXXXXX - and out of the country;
- In order to encourage your employees to accept travel, you wish to implement a policy that would allow the reimbursement of expenses incurred by employees indirectly related to their employment, such as childcare expenses, housekeeping expenses or any other expenses related to the employee's travel;
- To do this, you wish to develop a policy that would provide for the payment of allowances and the reimbursement of certain expenses:
1. Living Expenses: Employees travelling in the performance of their duties would receive living expense allowances in accordance with the Treasury Board Secretariat's terms and conditions for federal government employees.
2. Premium for travel away from home: an amount of $35 per night would be provided where an employee is away from home for two or more nights - including 12 hours on the third day - because of work.
3. Weekend premium: an amount of $100 per day would be paid to an employee who is on standby outside the region during a weekend. In order to receive that bonus, the employee would have to be available to the company. That premium would be in addition to the remote premium.
4. Travelling Time Allowances: Depending on the mode of transportation used, an employee would either be paid for all travelling time at regular rate or paid at regular rate for the first eight hours and half rate for all subsequent hours.
5. Reimbursement for lodging expenses considered reasonable and necessary.
QUESTION
In your fax, you wished to determine the tax consequences to your employees of the various items outlined above.
ANALYSIS
Travelling Expense Allowances
Interpretation Bulletin IT-522R, Vehicle, Travel and Sales Expenses of Employees, contains the Canada Revenue Agency's ("CRA") policy regarding the tax treatment of travel allowances paid to employees.
According to the CRA, the term "allowance" means any periodic or other payment that an employee receives from an employer, in addition to salary or wages, without having to justify its use. The CRA also states that an allowance is taxable unless it falls within the exceptions listed in subparagraphs 6(1)(b)(i) to (ix) or subsection 81(3.1) of the Income Tax Act (the "Act") or unless it is excluded from income under subsection 6(6).
If the CRA determines that the amount of an allowance reported as non-taxable is too high, the employee must provide supporting documentation or other acceptable evidence to establish that the allowance is reasonable. If the employee does not meet the burden of proof, the employee must include the full amount of the allowance in income.
Paragraph 6(1)(b) generally provides that an employee must include in income any amount received in the year as an allowance for personal or living expenses or as an allowance for any other purpose. In this case, the only provision that would exempt the allowances you propose to pay to your employees is subparagraph 6(1)(b)(vii), which reads as follows:
[R]easonable allowances for travel expenses (other than allowances for the use of a motor vehicle) received by an employee (other than an employee employed in connection with the selling of property or the negotiating of contracts for the employer) from the employer for travelling … in the performance of the duties of the employee’s office or employment … .
It should be noted that the exception to subparagraph 6(1)(b)(vii) applies only where the employee is outside the municipality in which the employer's place of business is located or outside the metropolitan area in which that place of business is located.
With respect to living expense allowances, it is the CRA's view that allowances calculated at the rates established by the Treasury Board Secretariat are reasonable and non-taxable by virtue of the exception in subparagraph 6(1)(b)(vii).
With respect to the remote and weekend premiums, you indicated that those amounts are intended to compensate an employee who is traveling for the performance of the employee’s duties and to defray the costs related to the employee’s absence from home.
We are of the view that those allowances cannot fall within the scope of subparagraph 6(1)(b)(vii) as they are clearly personal and living expense allowances that were not received by the employee for travel in the performance of the duties of the employee’s employment. Indeed, the exception in subparagraph 6(1)(b)(vii) is intended to exclude allowances to compensate an employee for expenses incurred in connection with, and not as a result of, travel. While your employees' extended absences may require them to incur certain expenses - for example, child care and housekeeping expenses - those expenses are not incurred while travelling outside the municipality or metropolitan area where the employer's place of business is located.
We bring to your attention a CRA policy dealing with the reimbursement of child care expenses. According to this policy, if an employer reimburses child care expenses incurred by an employee who is on travel status in the performance of employment duties, it is the CRA's position that such reimbursements are non-taxable.
Reimbursement of accommodation costs
With respect to expense reimbursements received by an employee, Interpretation Bulletin IT-522R provides the following definition of "reimbursement":
[A] reimbursement means a payment by an employer to an employee to repay the employee for amounts spent by the employee on the employer's business. […]
The CRA's position is that a reimbursement or accountable advance for travel expenses is not income to the employee who receives it, unless it is paid for the employee's personal expenses. That contention is based in part on Canada v. Huffman, [1990] F.C.J. No. 529, where the Federal Court of Appeal determined that a $500 clothing allowance was a non-taxable expense reimbursement.
In this case, based on the facts provided by you, we are of the view that your employees are not required to include in their income the amount of reimbursements received for lodging expenses incurred while traveling in the performance of their duties.
With respect to the aspect of your policy setting out compensation for hourly employees who are traveling, we do not believe that there are any specific tax consequences for such employees other than their obligation to include such amounts in their employment income.
We hope that these comments are of assistance.
Best regards,
François D. Bordeleau, LL.B.
Individuals, Business and Partnerships Section
Income Tax Rulings Directorate