Principal Issues: [TaxInterpretations translation] Are amounts received by the employee from the employer to compensate the employee for expenses incurred in the performance of the employee’s employment duties taxable?
Position: General comments on the different amounts received. Firstly, it must be determined whether it is an allowance or a reimbursement. If it is an allowance, paragraph 6(1)(b) of the Act provides that allowances for personal or living expenses or for any other purpose are taxable unless one of the exceptions in subparagraphs 6(1)(b)(i) to (ix) applies. If it is a reimbursement of expenses other than board and lodging, the amount is included in income under paragraph 6(1)(a) of the Act where it results in an economic benefit to the employee. The reimbursement of personal expenses would result in an economic benefit. Generally, we also consider an employee to have a taxable benefit where the employee is reimbursed, in whole or in part, for the cost of capital property that remains the employee’s property.
Reasons: For allowances received, this depends on the wording of paragraph 6(1)(b) of the Act except for clothing allowances in which case we have taken the position that the allowance is not included in the same circumstances as those in which reimbursements would be accepted. For reimbursements, the determination that an economic benefit results to the employee in the case of reimbursement of certain types of expenses is derived from previous positions.
XXXXXXXXXX Sylvie Labarre, CA
2004-008005
November 12, 2004
Dear Sir,
Subject: Tax treatment of amounts received from an employer
This is further to your letter of May 31, 2004, in which you requested our opinion on the taxability of allowances and reimbursements received by employees. We apologize for the delay in responding to this request.
Employees of a corporation perform certain tasks requiring certain equipment (fax machine and supplies, computer, video cameras, tape recorder, camera). The employer does not provide the equipment used by employees in the performance of their employment duties. Employees may be reimbursed for these expenses or compensated between $1.00 and $2.00 per hour for the employment-related use of tools, equipment, and supplies. Cell phone charges may also be compensated in the range of $0.30 per minute based on actual usage time.
Employees must also provide a motor vehicle that may have been modified for the purpose of their employment. Employees who use their motor vehicle are paid either $35 or $25 per day depending on the type of work performed. They also receive $0.35 per kilometer for travel on the job.
In addition, the employer compensates the employee for the following expenses incurred by the employee in the course of employment: meals, internet fees, and clothing allowance depending on the circumstances.
You wish to know if the various amounts received by the corporation's employees (listed above) should be included in their employment income.
If some of the amounts received are taxable, you wish to know if the employee would be entitled to a deduction of these amounts from employment income.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) 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 not, however, apply to your particular situation in certain circumstances.
Tax treatment of amounts received from the employer
Paragraph 6(1)(a) of the Income Tax Act (hereinafter the "Act") provides that the value of board, lodging and other benefits of any kind received or enjoyed by a taxpayer in the year in respect of, in the course of, or by virtue of an office or employment shall be included in computing the taxpayer's income. Paragraph 6(1)(b) provides that allowances received in the course of employment are taxable unless one of the exceptions in subparagraphs 6(1)(b)(i) to (ix) applies.
The tax treatment of an amount received will depend, inter alia, on whether the amount is a reimbursement or an allowance.
According to paragraph 40 of Interpretation Bulletin IT-522R, the word "allowance" means any periodic or other payment that an employee receives from an employer, in addition to salary or wages, without having to account for its use. It may be computed by reference to distance or time (for example, a "motor vehicle" expense allowance based on the distance driven or a travel expense allowance based on the number of days away) or on some other basis. On the other hand, an amount calculated on the basis of an estimate of possible costs is an allowance, not a reimbursement. The same is true of an amount paid on the basis of a rate per hour of use. If, on the other hand, the employer makes a payment to the employee based on receipts or vouchers submitted by the employee, this would be a reimbursement.
In this situation, we are of the view that the $1.00 to $2.00 per hour for use of equipment and supplies is an allowance. If the amount of $0.30 per minute for cell phone use is calculated based on an estimate of costs rather than actual costs, this amount would also constitute an allowance. Paragraph 6(1)(b) applies to amounts received as an allowance for personal or living expenses or as an allowance for any other purpose. An allowance for the use of equipment or supplies or an allowance for cell phone time is not one of the exceptions provided in subparagraphs 6(1)(b)(i) to (ix). Consequently, such allowances would be taxable.
Where an employee is reimbursed by the employee’s employer for expenses other than board and lodging, the reimbursement is included in computing the employee's income under paragraph 6(1)(a) where it results in an economic advantage or benefit to the employee. The reimbursement of the employee's personal expenses would result in an economic benefit to the employee and would be taxable. Generally, we also consider an employee to have a taxable benefit where the employee is reimbursed, in whole or in part, for the cost of equipment purchased by the employee and which remains the employee's property, even though the equipment may be used in the course of employment. However, reimbursement for supplies consumed directly in the performance of employment duties and reimbursement for the actual expense of using a cell phone for employment purposes would not be taxable because they do not result in an economic benefit to the employee.
The amount of $35 or $25 per day, as the case may be, paid for the use of the motor vehicle and the $0.35 per kilometer is an allowance paid for the motor vehicle and not a reimbursement for motor vehicle expenses.
We understand that the employee receives both parts of the allowance for the same use of the motor vehicle, i.e., a fixed amount per day and an amount based on a reasonable per kilometer rate. In such a case, the employee must include the total of this allowance in computing employment income as this allowance for the use of the employee's motor vehicle would not be considered reasonable for the purposes of the exception in subparagraph 6(1)(b)(vii.1). In particular, the allowance received would be deemed not to be reasonable because, as provided for in subparagraph 6(1)(b)(x), the use of the vehicle would not, for the purpose of determining that allowance, be determined solely on the basis of the number of kilometers driven in the course of performing the duties of the employment.
On the other hand, if an employee were to receive only the allowance calculated at the rate of $0.35 per kilometer driven in the course of performing the duties of the employee’s employment, we are of the view that the exception provided for in subparagraph 6(1)(b)(vii.1) would apply and that the amount of this allowance would not be taxable.
According to what you indicated in your letter, the employee may also be compensated for clothing depending on the circumstances. The cost of clothing for an individual is usually considered a personal expense. Consequently, it is our general view that reimbursement or an allowance for the purchase of clothing by the employer is a benefit to the employee. There is, however, one exception to the above. This is set out in Interpretation Bulletin IT-470R. Paragraph 29 of that Bulletin states that an employee who is supplied with a distinctive uniform which is required to be worn while carrying out the duties of employment or who is provided with special clothing designed for protection from the particular hazards of the employment, is not regarded as receiving a taxable benefit. The position in paragraph 29 also applies in situations where an employee receives a reimbursement or allowance for the cost of distinctive uniforms and special clothing.
In the situation you presented to us, we do not know whether the compensation paid for the Internet fees represents an allowance or a reimbursement of actual expenses incurred. If the amount was an allowance, it would be taxable pursuant to paragraph 6(1)(b) as there is no exception for this type of allowance. If it is instead a reimbursement of actual expenses, it would have to be determined whether the reimbursement was made primarily for the benefit of the employer or the employee. If the reimbursement is made primarily for the benefit of the employee, the amount must be included in the employee's employment income pursuant to paragraph 6(1)(a). If the facts show that this Internet access is essential for the employees to perform their employment duties, we are of the view that it is unlikely that a significant taxable benefit will result to the employees from the reimbursement of the Internet and modem fees. In such a case, the reimbursement would not be included in employment income.
In a situation where the employer pays compensation for meals in the form of an allowance, this allowance would not be taxable if, pursuant to subparagraph 6(1)(b)(vii), it was a reasonable allowance for travel expenses for the purpose of performing the duties of employment outside the municipality where the employer’s establishment at which the employee ordinarily worked or to which the employee ordinarily reported was located and in addition, if applicable, the metropolitan area where that establishment was located. If the employee were reimbursed for actual meal expenses in the same circumstances as set out in subparagraph 6(1)(b)(vii), we would consider that such reimbursement was made primarily for the benefit of the employer and is not taxable by virtue of paragraph 6(1)(a). However, we are of the view that the amount paid in respect of meals as an allowance or reimbursement, in circumstances other than those specified in subparagraph 6(1)(b)(vii), should generally be included in employment income.
Deduction of expenses against employment income
In this situation, the employee would be able to deduct the cost of supplies that were consumed directly in the performance of employment duties if the contract of employment required the employee to provide and pay for them to the extent that the employee has not been reimbursed and is not entitled to be reimbursed for them. For this purpose, the supplies would include the time for use of the cell phone. However, the supplies would not include the cost of tools or equipment or amounts paid for a cell phone connection or communication licence fee. There is no other provision in section 8 that would allow a deduction, in whole or in part, of the cost of tools in the situation you presented to us.
If the employee is in receipt of a taxable allowance for motor vehicle expenses, paragraphs 8(1)(h.1) and 8(1)(j) may permit the deduction of certain motor vehicle expenses incurred in the course of employment, if the conditions referred to in paragraph 8(1)(h.1) are satisfied.
If the employee receives a taxable allowance or reimbursement in respect of meals, consideration should be given to whether the conditions of paragraph 8(1)(h) and subsection 8(4) are satisfied which would allow a deduction for the meal expenses within the limit set out in subsection 67.1(1). If the conditions were not satisfied, the employee would not be entitled to a deduction.
For an employee who does not perform duties in connection with the selling of property or the negotiating of contracts for the employer, there is no provision in Section 8 that would allow a deduction for a monthly internet package or the cost of clothing.
These comments are not advance income tax rulings and are not binding on the CRA with respect to any particular situation.
Best regards,
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch