Principal Issues: [TaxInterpretations translation] Is the reimbursement by an employer of the cost of accommodation and evening meal while the employee is in his new accommodation taxable as the reimbursement covers a period of more than 15 days?
Position: Reimbursement of such expenses would not be taxable if they are reasonable, which is a question of fact. The CRA's position is not to rely on a maximum number of days to determine whether the living expenses were reasonable for the purposes of paragraph 6(1)(a) of the Act.
Reasons: The fifteen-day limit applies in respect of the deductibility of moving expenses in section 62 but there is no such limit for the purposes of section 6.
February 8, 2005
Mr. Pierre Laporte Headquarters Sherbrooke Tax Service Office Sylvie Labarre, CA (613) 957-8953 Business Counter 2004-009968
Reasonable living expenses
This is further to your fax of October 22, 2004 in which you asked for our opinion on the request made by XXXXXXXXXX in relation to the payment by an employer of living expenses incurred during an employee's move.
Facts
On August 24, 2004, an employer hired a person who lived more than 40 kilometres away from its plant. Since the plant is located in an area experiencing a housing crisis, the employer decided to pay living expenses for the employee until the employee was permanently housed at the new location. Thus, the employer paid for the employee's room and board five times a week until the employee's housing was secured (October 1, 2004) through a daily allowance of $50 per day. The duration of the payment was 28 days. The employee was not reimbursed for other types of moving expenses.
Question
The employer wishes to know if the living expenses paid to the employee were reasonable even if they exceeded the 15-day period, listed in Guide T4130 for the year 2003-2004, and if those reasonable living expenses were part of the employee's employment income.
Our Comments
In this situation, it must first be determined whether the daily allowance represents a reimbursement of expenses actually incurred by the employee or whether it is an allowance for which the employee does not have to justify its use. Indeed, the tax treatment may differ depending on whether the payment represents an allowance or a reimbursement.
Paragraph 6(1)(b) of the Income Tax Act (the "Act") provides for the inclusion in an employee's employment income of "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 those specifically excluded). The term "allowance" is not defined in the Act. In paragraph 40 of Interpretation Bulletin IT-522R of March 29, 1996, the term "allowance" is defined as 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.
Paragraph 6(1)(b) does not provide an exclusion for an allowance paid for moving expenses. However, the Canada Revenue Agency (CRA) has an administrative position regarding a non-accountable allowance for incidental relocation or moving expenses of an employee. The CRA considers such an allowance of $650 or less to be a reimbursement of expenses incurred by the employee for the move and to not be taxable. In order for this administrative position to apply, the employee must certify in writing that the employee has incurred incidental expenses in an amount at least equal to the allowance of $650 or less received. Any portion of the allowance received that exceeds $650 is taxable.
Alternatively, an employee could receive a reimbursement of expenses rather than an allowance. Paragraph 50 of the same Bulletin states that a "reimbursement" is a payment made by an employer to an employee to repay the employee for amounts spent by the employee in the performance of employment duties that relate to the employer's business.
Even if the employer uses the term "allowance" to refer to a payment made to an employee, it is possible that the allowance is more a reimbursement of expenses. For example, if the allowance is based on the actual costs that the employee will incur for accommodation and dinner, or if the employee must show the employer how the allowance was spent, then the allowance may be a reimbursement of expenses and not a taxable allowance.
An employee must include in income, under paragraph 6(1)(a), an amount received from the employer as reimbursement for personal expenses. However, the CRA does not consider the reimbursement of reasonable living expenses incurred until the employee permanently occupies the employee’s new home to be a reimbursement of personal expenses. Thus, reimbursement of such expenses, as long as they are reasonable, will not be taxable. Whether or not living expenses are reasonable is a question of fact. It is the examination of all the facts of a particular situation that will determine whether the expenses are reasonable. In this regard, the 2004-2005 T4130 no longer states that reasonable living expenses are limited to a maximum of 15 days. Thus, it is possible that living expenses may be considered reasonable even if they cover a period longer than 15 days.
In this situation, you may wish to submit the letter from XXXXXXXXXX and this letter to your Trust Accounts Division for consideration as to whether the amounts paid by the employer are in fact a reimbursement and whether the reimbursement of expenses for a period of 28 days is reasonable in light of, inter alia, the housing crisis referred to by XXXXXXXXXX
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance. If you require any further information regarding the content of this document, please do not hesitate to contact us.
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
Encl.