Dear Sirs:
This is in reply to your letter of March 1, 1991 asking for our views on a situation where an employer makes payments in respect of tools used by employees in carrying out their employment duties.
In your letter, you have set out the following situation:
24(1)
Pursuant to our telephone conversation on April 8, it is our understanding that your situation relates to a specific proposed transaction. The Department will only consider the tax consequences of such a transaction where an advance income tax ruling has been requested. The procedure for requesting an advance income tax ruling are set out in Information circular 70-6R2. We are however, providing the following general comments which we hope are of assistance to you.
In a situation where an employer makes payments to employees with respect to the use of their tools in the employer's business, it is our view that the payments are received by virtue of an employee\employer relationship. Accordingly, the amounts are taxable in the hands of employees as employment income rather than rental income. It is also our view that by virtue of subsection 8(2) of the Income Tax Act, neither the cost of the tools nor expenses in repairing them may be deducted by the employees.
These comments are consistent with paragraph 23 of Interpretation Bulletin IT-470R entitled "Employees' Fringe Benefits" which indicates that payments made in similar circumstances are taxable under paragraph 6(1)(a) of the Income Tax Act.
We trust our comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch