Principal Issues: [TaxInterpretations translation] What is the tax treatment of the amounts received by the two individuals hired by XXXXXXXXXX?
Position: The amounts received are either taxable salary under subsection 5(1) of the Act or a reimbursement of expenses or an allowance taxable under paragraph 6(1)(a) or (b) unless subsection 6(6) applies.
Reasons: According to the contracts submitted, the sums involved appear to be paid on the basis of services rendered, and are therefore a salary. Where an individual receives such salary, there is no relief available as opposed to certain reimbursements or allowances which may be excluded from income under section 6(6) or section 6(1)(b)(iii).
XXXXXXXXXX 2004-007091
N. Deslandes, CGA
March 18, 2005
Dear Madam, Sir,
Subject: Taxation of amounts received from XXXXXXXXXX
This is in response to your letter of April 2, 2004 in which you requested our opinion on the above subject. We apologize for the delay in responding to your request.
You are both residents of Quebec and are volunteers with the XXXXXXXXXX organization.
You told us that this organization pays you a monthly sum of money which they call an “indemnity/allowance” and which is intended to cover expenses and costs incurred locally such as accommodation, food, restaurants and so on.
For example, you have sent us two contracts that you have concluded with XXXXXXXXXX. You state that the contracts are not necessarily identical from one time to another.
Question:
You wish to know the tax treatment of the amounts received monthly under the contracts signed with XXXXXXXXXX.
Comments:
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of our Directorate not to issue a written opinion regarding proposed transactions otherwise than by 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 which may not apply in full to the situation you have submitted to us.
We have assumed that there is always an employee/employer relationship between you and XXXXXXXXXX. If this is not the case in a particular situation, the following comments would not apply.
As discussed in a telephone conversation (XXXXXXXXXX/Deslandes), we cannot determine the precise tax treatment of all amounts you receive from XXXXXXXXXX as the terms and conditions of your contracts with XXXXXXXXXX may differ from one engagement to another. Since you are familiar with the terms and conditions of each of your contracts with XXXXXXXXXX, we hope that the following general comments will help you to determine the tax treatment of the amounts you receive.
Our understanding is that you are residents of Canada. Consequently, your income from an office or employment will generally be taxable in Canada even if the employment is outside Canada.
Generally speaking, income from an office or employment includes any salary, wages or other remuneration (pursuant to subsection 5(1) of the Act) as well as the value of board, lodging or other benefits received in connection with the employment and most allowances for personal or living expenses or for any other purpose (pursuant to subsection 6(1)).
In your situation, you must first establish whether the sums received constitute a salary, a reimbursement of expenses or an allowance for personal or living expenses, since the tax treatment may differ depending on the nature of the amounts involved.
Characterization of amounts received
Whether the amounts received constitute salary (or other remuneration), reimbursement of expenses or an allowance is a question of fact. Among other things, the employer's or employee's contracts, agreements or other documentation should be examined to make this determination.
Where sums are paid for services rendered, they are usually wages.
The wording of the contracts you have submitted to us refers to "remuneration", which gives the impression that the sums involved are, in fact, wages, i.e. a sum paid for services rendered. If so, those amounts must be included in computing your employment income pursuant to subsection 5(1) of the Act. There is no indication in these contracts, contrary to what you indicated in your letter, that those amounts could constitute a reimbursement of expenses or an allowance.
Although the term "allowance" is not defined in the Act, it means any periodic or other payment that an employee receives from the employee’s employer, in addition to salary or wages, without having to justify its use. The allowance may be calculated on the basis of distance or time (for example, a motor vehicle allowance based on distance travelled or a living allowance based on the cost of living in Canada) or on any other basis.
In the context of a given assignment or contract, you may conclude, after examining the facts surrounding the assignment or contract, that part of the amounts received qualify as reimbursements or allowances. If this is the case, the tax treatment may be different depending on the type of reimbursement or allowance and the particular facts of your situation.
Where amounts are reimbursed for personal expenses of the employee, those amounts must be included in the employee's income by virtue of paragraph 6(1)(a) unless subsection 6(6) of the Act applies.
Where amounts qualify as allowances, they are generally included in income under paragraph 6(1)(b) unless they satisfy the conditions of one of the exceptions set out in subparagraphs 6(1)(b)(i) to (ix) or the exception set out in subsection 6(6). Of those exceptions, particular consideration should be given in your situation to the application of subsection 6(6) or subparagraph 6(1)(b)(iii).
Subsection 6(6) of the Act: Employment at a special work site
Subsection 6(6) of the Act states that, in certain circumstances, reimbursements or allowances paid to an employee for board and lodging and certain travel expenses incurred during a particular period at a special work site are excluded from income. Subparagraph 6(6)(a)(i) exempts reimbursements or allowances for board or lodging if all of the following requirements apply:
1. The amount of the reimbursement or allowance must be reasonable;
2. The duties performed by the employee at the special work site were of a temporary nature;
3. The employee maintained at another location a self-contained domestic establishment as the employee’s principal place of residence:
- that was, throughout the period, available for the employee’s occupancy and not rented by the taxpayer to any other person, and
- to which, by reason of distance, the employee could not reasonably be expected to have returned daily from the special work site.
4. The period during which the employee was required by the employee’s duties to be away from the employee’s principal place of residence, or to be at the special work site or location, was not less than 36 hours.
We have attached Interpretation Bulletin IT-91R4, Employment at Special Work Sites or Remote Work Locations, which explains, specifically in paragraphs 4 to 11, the application of subsection 6(6).
Subparagraph 6(1)(b)(iii) of the Act: Representation or other special allowances
Subparagraph 6(1)(b)(iii) states that an allowance is not included as income from an office or employment if it represents a representation or other special allowances received in respect of a period of absence from Canada as a person described in paragraph 250(1)(d) of the Act.
A person is described in paragraph 250(1)(d) if the person is a person who performed services, at any time in the year, in a country other than Canada under a prescribed international development assistance program described in section 3400 of the Income Tax Regulations (the "Regulations") established or undertaken by the Government of Canada and was resident in Canada at any time in the three-month period immediately preceding the day on which that person's services commenced.
The Government of Canada's international development assistance programs covered by section 3400 of the Regulations include the Canadian International Development Agency's ("CIDA") international development assistance programs financed from funds (other than development assistance loans) provided by External Affairs Vote 30a under Appropriation Act No. 3, 1977-78, or by another vote providing for such funding.
XXXXXXXXXX For a particular mandate, you may wish to obtain information from the organization, such as XXXXXXXXXX, as to whether the program in which you are participating is a program funded by CIDA. If so, the allowance you receive under that mandate may be excluded from your income pursuant to subparagraph 6(1)(b)(iii) if it is a representation allowance or other special allowance.
A representation allowance, in the context of subparagraph 6(1)(b)(iii), is an allowance paid to an employee who is required to perform duties in a foreign country in order to alleviate the inconvenience of relocation, to assist in adjusting to different living conditions and, where applicable, to an increased cost of living. An amount can generally be considered a special allowance when it is paid to an employee who is transferred or posted abroad and thus incurs additional expenses.
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 that these comments will be of assistance.
Best regards,
Ghislaine Landry, CGA
Manager
Individuals, Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Encl.