Principal Issues: [TaxInterpretations translations]
Are allowances covering accommodation, travel and food for a trainee taking part in an international program for a period of 6 months excluded from income under subsection 6(6) of the Act?
Position:
Yes, if the conditions set out in subsection 6(6) of the Act are satisfied.
Reasons:
Question of fact. A review of the facts surrounding each trainee's situation is necessary to determine whether or not allowances are excluded from income under 6(6).
XXXXXXXXXX 2000-003369 Nancy Deslandes Attention: XXXXXXXXXX
July 27, 2000
Dear Sir,
Subject: Living Expense Allowance
This is in response to your letter of March 21, 2000 from the Jonquière Tax Centre. You asked for our opinion on the tax implications of allowances received by participants in the Youth Employment Strategy international internship program sponsored by Human Resources Development Canada.
You told us that a work placement lasts 6 months and is designed to give young graduates work experience abroad in a field related to their studies. You run this program in partnership with employers who have an international network.
You pay participants a monthly allowance to cover living expenses, accommodation and local travel abroad, as well as travel to and from the work placement. We understand that the participant must receive remuneration either in the form of a salary or an allowance.
You described the situation of a participant who received an allowance of $1,300 per month, divided as follows: $500 was paid for accommodation, $200 was paid for travel and $600 was paid for food.
Your Question
You wish to know whether the allowances received by a participant in your program should be included in the participant’s income.
Our Comments
It seems to us that the situation you have described is not hypothetical and may represent proposed transactions. As stated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, it is the practice of our Directorate not to issue written opinions regarding proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to whether a completed transaction has received appropriate tax treatment, that determination rests first with our Tax Services Offices following 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.
In general, all allowances received or enjoyed by an employee in the course of an office or employment for personal living expenses are taxable under paragraph 6(1)(b) of the Act. In the case of an internship obtained through your program, it will first be necessary to determine whether an intern is an employee of the company to which the intern renders services or is self-employed. Whether an individual is an employee or self-employed is a question of fact. In order to do so, it is not only necessary to examine the employment contracts between the parties, but it is also necessary to examine the facts and circumstances surrounding the working conditions of the intern at the time the intern performs the services for the host company.
In a case where it is determined that an intern is an employee, paragraph 6(1)(b) applies to render the allowances received by the trainee in the course of employment taxable. There are, however, certain exceptions to this general rule. Among other things, subsection 6(6) sets out exceptions that could apply to your situation. This subsection states in particular that certain allowances paid to an employee for board and lodging and for travel expenses incurred during a given period at a special work site are excluded from the employee’s income.
The purpose of that exception is to recognize that where an employee is required to work on a temporary basis at a work location that is a significant distance from the employee's usual place of residence, it would not be reasonable to expect the employee to dispose of the employee’s current residence and move to the new location for a short period of time. In addition, that subsection recognizes that where an employee continues to incur expenses in order to maintain the employee’s principal place of residence without receiving rental income in return, a benefit is not provided if the employer makes available, or reimburses the employee for, expenses incurred in connection with a temporary residence at the special work site.
Subparagraph 6(6)(a)(i) exempts allowances for board or lodging if all of the following requirements are satisfied:
1. The allowance must be reasonable;
2. The work performed by the employee on the special work site was of a temporary nature;
3. The employee maintained at another location a self-contained domestic establishment as the employee’s principal place of residence;
(a) that was, throughout the period, available for the employee’s occupancy and not rented to any other person;
(b) to which, by reason of distance, the taxpayer 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 taxpayer’s principal place of residence, or to be at the special work site or location, was not less than 36 hours.
Whether an allowance is reasonable is a question of fact that can only be resolved after an examination of all the facts surrounding a particular situation. Generally, to be reasonable, an allowance must be comparable to the actual expenses it covers.
In the situation you have presented, it seems to us that the second criterion, namely that the work performed be of a temporary nature, would be satisfied. Although the Act does not define the term “temporary in nature”, the following comments are found in paragraph 6 of Interpretation Bulletin IT-91R4, Employment at Special Work Sites or Remote Work Locations:
… as a general rule, duties will be considered to be of a temporary nature if it can reasonably be expected that they will not provide continuous employment beyond a period of two years.
To determine the expected duration of the employment, it is necessary to rely on facts known at the beginning of the employment.
Since the placement is 6 months, we are of the view that this condition is satisfied.
A third condition for the application of subparagraph 6(6)(a)(i) is that the employee maintained at another location a self-contained domestic establishment as the employee’s principal place of residence. In our view, in the context of that subparagraph, the expression “maintained” must be interpreted as meaning “incurred expenses in respect of the self-contained domestic establishment (residence)”. Pursuant to subsection 248(1), a self-contained domestic establishment means a dwelling-house, apartment or other similar place of residence in which place a person as a general rule sleeps and eats. A residence is considered to be a self-contained domestic establishment if it is a residential unit with restricted access and is equipped with a kitchen, bathroom and sleeping area. However, the following are not normally considered to be self-contained domestic establishments: one or more hotel rooms, a dormitory, a room in a boarding house and a service barrack. Thus, an intern who normally lives with the intern’s parents would not have a self-contained domestic establishment. Consequently, the allowances received by such an intern would be taxable because they would not satisfy the test set out in subparagraph 6(6)(a)(i).
With respect to travel allowances in particular, paragraph 6(6)(b) excludes from an individual's income reasonable allowances received for transportation between the individual's principal place of residence and the special work site for the period referred to in 4 above if, for that period, the employee received a reasonable board and lodging allowance from the employer. Any other allowances paid for personal travel to the work site should be included in an intern’s income.
In conclusion, it is not possible to confirm whether, as a general rule, allowances paid to interns are taxable or not, as each case differs from one applicant to another. Only an examination of the facts surrounding each candidate's situation will enable such a determination to be made.
In a situation similar to the one you have submitted to us, we are of the view that if the allowances paid to trainees satisfy the conditions of subsection 6(6), they would not be included in income. If this is the case, you and the employee will need to complete a TD4 form, Declaration of Exemption - Employment on a Special Work Site, in order for the allowances in question to be excluded from the employee's income. Should you require assistance in completing that form, please do not hesitate to contact Nicole Massicotte of the Trois-Rivières Tax Services Office Customer Assistance Department at (819) 371-7048.
Please note that if you determine that the interns are in fact self-employed, subsection 6(6) would not apply and, consequently, the allowances would be taxable as business income.
Form TD4 and Interpretation Bulletin IT-91R4 are available on our website at www.ccra-adrc.gc.ca.
These comments are not advance income tax rulings and do not bind the Canada Customs and Revenue Agency. We hope you find them of assistance.
Best regards,
Ghislain Martineau
Acting Manager
Individuals and Business Section
Individuals and Publications Division
Income Tax Rulings Directorate
c.c.: Ms. Ghyslaine Lévêque
Ms. Nicole Massicotte
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