9 July 1997 External T.I. 9714755 - ALLOWANCES OF MUNICIPAL OFFICERS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether a proposed change to the Ontario Municipal Act will result in no amount qualifying as an allowance for purposes of s. 81(3) of the Income Tax Act?

Position:

The proposed change can be interpreted in two different ways. Regardless, it is likely that under the proposed change an allowance for purposes of s. 81(3) can still be paid.

Reasons:

As long as the conditions of s. 81(3) are satisfied, a Municipal Act cannot change what actually transpired. ie., where an actual allowance is paid, a Municipal Act cannot deem it not to be an allowance for purposes of the Income Tax Act.

	                           	971475/971207
XXXXXXXXXX	                          Sandra Short

Attention: XXXXXXXXXX

July 9, 1997

Dear Sirs:

Re: Subsection 81(3) of the Income Tax Act (the "Act")

This is in reply to your correspondence of April 25, and May 21, 1997, concerning subsection 81(3) of the Act. You have asked:

(1)whether subsection 81(3) of the Act applies to a situation where no amount has been paid to a municipal officer as an allowance for expenses incident to the discharge of the person's duties as such an officer or member, and

(2)that we confirm that the comments in paragraph 7 of Interpretation Bulletin IT-292 will apply if Bill 73, an Act to amend the Municipal Act, is passed by the Legislative Assembly of Ontario. Bill 73 proposes to repeal section 255 of Ontario's Municipal Act and substitute the following:

Despite this Act or any other general or special Act, beginning in 1997, if an elected member of a council of a municipality or a local board, as defined in the Municipal Affairs Act, receives a salary, indemnity, allowance or other remuneration under a by-law or resolution of the council or the local board, no part of that amount shall be deemed to be paid for expenses incident to the member's discharge of duties.

You have expressed the opinion that a base salary, paid by a municipal corporation to a municipal officer, is not an amount paid "as an allowance" and, accordingly, subsection 81(3) does not apply to it. As a result, no amount of the remuneration received by the officer is exempted from income. You have cited LaFlair v. M.N.R. (56 DTC 451) as support for your position.

It is your view that if Bill 73 is passed into law, paragraph 7 of IT-292 would operate to allow one-third of the total remuneration paid to be considered an "expense allowance" for purposes of subsection 81(3) of the Act, but only to the extent of the actual "expense allowance" paid.

Our Comments:

(1)Generally, to qualify as an expense allowance for tax purposes, an amount must in fact be paid as an expense allowance. However, as you are aware, section 255 of the Ontario Municipal Act currently deems one-third of amounts paid to be for expenses incident to the discharge of the duties of such officer or member. It is the Department's position that when a Municipal Act contains a deeming provision such as this, the proportion so deemed to be an expense allowance (up to one third of the total paid) is accepted as an expense allowance notwithstanding that local bylaws may specifically allocate portions of the total to salary, indemnity, allowance or other remuneration. This position is published in paragraph 6 of Interpretation Bulletin IT-292.

While it is the Department's long existing policy to recognize, where possible, the deeming provisions of Municipal Acts, it does not recognize an enactment which converts retroactively an amount paid originally as salary to an expense allowance. The reason that the LaFlair case was before the Appeal Board was because it was the Department's position that a 1953 amendment to The Municipal Act of Ontario could not retroactively change the nature of payments made in 1951 and 1952.

(2)It is our understanding that Bill 73 is a private member's bill in the province of Ontario, which received first reading only on June 11, 1996. We have reviewed the wording of Bill 73 and are of the opinion that the provision, as currently drafted, may be interpreted in two possible ways:

(i) Section 255 will no longer deem any amount received by an official to be for expenses incident to the member's discharge of duties

or

(ii) Section 255 continues to have a deeming provision which now provides that no amount (that is, zero) is paid for expenses incident to the discharge of an official's duties.

If the Department applied the first interpretation, paragraph 7 of Interpretation Bulletin IT-292 would be used to determine that portion of an expense allowance which would not be subject to tax. If the second interpretation was applied, it is our view that an official may remain entitled to not include all or a portion of that allowance into income for purposes of subsection 81(3) of the Act. We believe that the LaFlair decision, wherein it was held that "nothing appearing in a provincial statute can alter the incidence of taxation as provided for in the Income Tax Act," could prevail. We believe that the federal Income Tax Act will entitle an official, to whom subsection 81(3) is otherwise applicable, to receive an expense allowance tax free, to the extent provided for in the provision, so long as the conditions of the subsection are met and that nothing in the Municipal Act of a province will act to change what actually transpired between the official and employer.

We trust our comments will be of assistance to you.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch