Principal Issues: [TaxInterpretations translations] Is the agreement between the Canadian Construction Association and the Canada Revenue Agency - as referred to in Compliance Programs Branch News Release AD-98-24 - still in effect? If so, what portion of an allowance covered by the agreement is subject to the deductibility limit found in subsection 67.1(1) of the Income Tax Act?
Where a portion of an allowance is subject to the restriction found in subsection 67.1(1), what portion of the allowance qualifies for an input tax credit under the Excise Tax Act?
Position: The agreement is still in effect. The portion of an allowance subject to the deductibility limit in subsection 67.1(1) will be determined by applying the agreement.
Where subsection 67.1(1) applies, 50 per cent of the tax paid or payable on the total amount of food, beverage or entertainment expenses is eligible for an input tax credit.
Reasons: Implementation of the agreement.
2006-018547 XXXXXXXXXX Anne Dagenais, Advocate, M. Fisc. (613) 957-2121 March 2, 2007
Dear Sir,
Subject: Request for Technical Interpretation - Subsection 67.1(1) of the Act and sections 174 and 236 E.T.A.
This is in response to your letter of May 5, 2006, in which you asked for our opinion on the above subject. We apologize for the delay in responding to your question.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Facts
Your letter states the following facts:
(1) A company carries out work at construction sites that require its employees to travel for an extended period;
(2) Some of these employees are unionized while others are not;
(3) Under the various laws of the Commission de la Construction du Québec (the "CCQ"), the company is required to pay daily allowances to its unionized employees in accordance with scales established by the CCQ;
(4) These daily allowances are currently $89 and are usually paid on a weekly basis by the company's payroll department;
(5) Allowances are also paid by the company according to the same scales to non-unionized employees, not governed by the CCQ, who are required to report for work at those various sites;
(6) The allowances relate to the costs incurred by the workers for meals and accommodation during the period they are at those work sites;
(7) Since the allowances paid to employees are not covered by paragraph 67.1(2)(e) or 67.1(2)(e.1), they are subject to the general deductibility rule found in subsection 67.1(1).
(8) Since it can be difficult to determine the portion of allowances that cover meal expenses, the CRA and the CCA negotiated an agreement in 1998 to establish the portion of allowances that was to be deemed to cover employee meal expenses. That agreement is illustrated in the following table:
|
Amount of daily allowance |
Meal portion |
|
$75 and under |
15% |
|
Between $75 and $100 |
$11.25 plus 20% of the balance |
|
Between $100 and $125 |
$16.25 plus 30% of the balance |
|
Over $125 |
$23.75 plus 40% of the balance |
(9) The draft agreement stipulated that CCA members who wished to take advantage of that settlement had to confirm their acceptance in writing to the CRA office by September 30, 1998, and file a new tax return for 1997. Failure to do so could result in the CRA applying a weighting to the food component equivalent to 40% of the daily allowance.
Questions
You would like written confirmation that the agreement described above between the Canada Revenue Agency (“CRA") and the Canadian Construction Association ("CCA") is still in effect for the purpose of determining the meal portion of living allowances paid to employees working away from their usual place of work. In addition, you asked the following questions:
(1) What portion of the allowances is subject to the deductibility limit found in subsection 67.1(1) as food, beverage and entertainment expenses?
(2) What portion of the allowances qualifies for an input tax credit ("I.T.C.") under section 174 of the Excise Tax Act ("E.T.A.")?
Your Opinion
Subsection 67.1(1) provides that an amount paid or payable in respect of food or beverages or the enjoyment of entertainment is deemed to be 50% of the lesser of the amount actually paid or payable and an amount that would be reasonable in the circumstances. An allowance such as the one paid by a company to its employees in this case is intended to cover several types of expenses that employees incur (such as accommodation and meal expenses) when they are required to be absent for an extended period of time to work at construction sites.
It is your understanding that the arrangement as illustrated above may apply to any per diem allowance, except an allowance that is subject to subsection 67.1(2). You indicated that a position of the Appeals Division of the CRA dated January 1999 would tend to confirm your impression.
Based on your discussions with a CRA employee, the 1998 agreement is still in effect at the rates indicated. Furthermore, you understand that CRA uses the above rates to determine the meal portion of any allowance paid for any type of business, whether or not the employees are unionized and whether or not the taxpayers have made the 1998 election described above.
Finally, you are of the view that in the circumstances mentioned where the meal portion is limited to 50%, the I.T.C. is calculated on the basis of the amount deductible under the Act.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is our practice not to issue written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
We confirm that the 1998 agreement between the CRA and the CCA as described above is still in effect in its entirety with one exception. Taxpayers are no longer required to submit their acceptance of the determination of the meal portion of an allowance in writing to their local Tax Services Office. Thus, the rates indicated may still be used to determine the meal portion of allowances paid as long as the allowances are reasonable in relation to the costs incurred and subject to the conditions listed in the agreement.
The portion of any allowance attributable to food, beverages or entertainment - whether determined under the agreement or not - is subject to the restriction in section 67.1 to the extent that subsection 67.1(2) does not apply to a living allowance - including a meal component - paid to an employee working away from his or her usual place of work. As a general rule, if an allowance for food, drink and entertainment is considered reasonable for income tax purposes, it will also be reasonable for Goods and Services Tax ("GST") purposes under section 174 of the ETA.
Pursuant to section 236 of the E.T.A., where section 67.1 applies to limit the deduction of an amount paid or payable for food, beverages or entertainment to 50 per cent of the cost, 50 per cent of the GST paid or payable in respect of those expenses will be eligible for an I.T.C.
Finally, the CRA is of the view that the approach called for in the agreement with the CCA can be applied to all taxpayers in circumstances similar to those described in the agreement, regardless of the industry in which they are engaged.
These comments are not advance income tax rulings and do not bind the Canada Revenue Agency with respect to any particular factual situation.
We hope you find these comments of assistance. Should you require any additional information regarding the content of this document, please do not hesitate to contact us.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
c.c. Bernie Lum
Technical Applications Division
and Evaluation Division
Directorate General of
Observation Programs
c.c. Michèle Lacasse
General Operations Division
and Border Issues
Excise and GST/HST
GST/HST Rulings Directorate