May 15, 1997
Dear XXXXX:
This is in reference to your Memorandum dated August 22, 1996, and our numerous telephone conversations concerning XXXXX (the "employer") ITC entitlement with respect to amounts paid to their employees in accordance with XXXXX (the "agreement").
Statement of Facts:
In your submission you provide the following facts for our consideration:
1. The employer is one of XXXXX companies included in XXXXX which has an agreement XXXXX XXXXX with XXXXX. Pursuant to article XXXXX of the agreement, the employer, a GST registrant, pays, inter alia, the following amounts to its XXXXX employees:
a) XXXXX per day when the employee is working on construction, modernization or scheduled repair work in XXXXX which consists of the area XXXXX. Any employee driving a company vehicle, or riding as a passenger in a company vehicle who is picked up and dropped off at their place of residence, is not entitled to the above per diem rate;
b) XXXXX each way per day as a total expense remuneration per employee when working on construction, modernization or scheduled repair work between the XXXXX area described in a) above and the limit of a XXXXX radius from XXXXX[;]
c) XXXXX per day worked when the employee is assigned to work in XXXXX[;] and,
d) XXXXX per week for each full week when the employee is assigned to work beyond XXXXX as described in c) above. Where the employee is assigned for less than a full week in the area described in this paragraph, the employee will receive the per diem rate described in c) above XXXXX[.]
2. The agreement also states that should the amounts of XXXXX per day and XXXXX per week be "deemed insufficient to provide reasonable compensation for food, shelter, and incidental expenses", the amounts may be adjusted by agreement between the employer and the Union, and the employer may require that legitimate receipts be furnished to substantiate the increased compensation request. Furthermore, where the actual expenses fall below the agreed amounts, the amounts may be adjusted by agreement between the employer and the Union.
3. It is also noted that article XXXXX of the agreement (i.e., compensation for overtime travel outside of the jurisdictional radius) states that expenses incurred by the employee during the trip shall be paid for by the employers. Furthermore, article XXXXX of the agreement entitles an employee to claim XXXXX per kilometre XXXXX or the use of the employee's personal vehicle for traveling in connection with their employment.
4. Lastly, you have been advised by the employer that:
a) the payments described in 1a) to d) above are fully deductible for income tax purposes;
b) no amount of the payments is reported on the employees' T-4s (i.e., the amounts paid are not considered to be taxable benefits to the employees); and
c) despite the wording in the agreement with respect to the potential for adjusting the amounts, vouchers are not required from each employee.
Your question is whether the amounts in 1a) to d) above are considered travel allowances for purposes of section 174 of the Excise Tax Act (the "ETA") which, in turn, may permit the employer to claim input tax credits pursuant to subsection 169(1) of the ETA. With this in mind, you have asked that we review your draft application ruling letter addressed to the employer's representative, XXXXX[.]
Department's Position:
To be eligible for an input tax credit under subsection 169(1) of the ETA in respect of travel and other allowances, the employer must firstly satisfy all the following conditions provided under GST Policy Statement P-075: "Allowances and Reimbursements" and section 174 of the ETA:
I. the allowance must be a limited and predetermined payment received from the employer to enable the employee to discharge a certain type of expense. The allowance must also be at the complete disposition of the employee with no requirement to provide receipts or documentation substantiating that the amount was spent by the employee;
II. the allowance must be for supplies all or substantially all of which are taxable supplies (other than zero-rated supplies) of property or services acquired in Canada by the employee in relation to activities engaged in by the employer, or the allowance must be for the use in Canada of the motor vehicle in relation to the activities engaged in by the employer;
III. all or a portion of the allowance must be deductible in computing the employer's income for a taxation year for purposes of the Income Tax Act (the "ITA"), or would have been deductible if the employer was a taxpayer under the ITA and the activity was a business; and
IV. in the case of an allowance to which subparagraph 6(1)(b)(v), (vi), (vii) or (vii.1) of the ITA would apply if the allowance were a reasonable allowance for the purpose of that subparagraph, the employer must have considered, at the time the allowance was paid:
• that the allowance would be a reasonable allowance for those purposes; and
• that it would be reasonable for the employer to have considered that the allowance would be a reasonable allowance for those purposes.
Accordingly, where the employer has satisfied all the above conditions, the employer will be entitled to an input tax credit in respect of the deemed tax paid on the allowance provided that all the conditions under the ETA have also been met.
It is important to note that the GST treatment of travel allowances is largely dependent on its treatment for income tax purposes. For this reason, we decided to request from the Income Tax Rulings and Interpretations Directorate ("ITR&I") a determination as to whether the conditions described in I, III and IV above have been satisfied when considering the above fact situation (copy of our letter dated November 26, 1996, attached). In a recent letter (dated February 13, 1997, copy also attached), the ITR&I replied to our queries. The following GST interpretation is therefore heavily founded on this interpretation.
Paragraph 174(a) of the ETA:
In their letter, ITR&I states on page 2, under the heading "Item 1 of your letter", that: "... the amounts described in a) to d) above fall within the definition of "allowance" for the purposes of 6(1)(b) the Income Tax Act.". Their conclusion is based on the meaning of the word "allowance" discussed in paragraph 40 of Interpretation Bulletin IT-522R: "Vehicle, Travel and Sales Expenses of Employees". As indicated in GST Policy Statement P-075, the term "allowance" is interpreted to have the same meaning for purposes of section 174 of the ETA as it has for income tax purposes. With this in mind, we have also determined that the amounts paid by the employer pursuant to article XXXXX of the agreement will be considered to be "allowances" for GST purposes. Accordingly, the employer will satisfy the conditions under paragraph 174(a) of the ETA provided that the allowances are paid for supplies all or substantially all of which are taxable supplies (other than zero-rated supplies) of property or services acquired in Canada by the employee, or for the use in Canada of a motor vehicle, in relation to the activities engaged in by the employer.
Paragraph 174(b) of the ETA:
ITR&I indicates on page 3, under the title "Item 4 of your letter", that: "The amounts paid by the employer pursuant to article XXXXX of the agreement would likely be deductible by the employer whether the amounts are non-taxable or a taxable amount to the employee.". Consequently, for purposes of the GST, the allowances paid by the employer pursuant to the said article in the agreement will satisfy the requirements under paragraph 174(b) of the ETA insofar as the allowances are in fact deductible in computing the income of the employer for ITA purposes.
Paragraph 174(c) of the ETA - amounts described in 1a) above:
ITR&I says on page 2, second paragraph under the heading "Item 2 of your letter", that: "of the four exceptions provided in subparagraph 6(1)(b) (v), (vi), (vii) or (vii.1) of the Act ... only subparagraph 6(1)(b)(vii) of the Act may apply to some of the allowances.". The paragraph further says that: "... the allowances described in a) above ... do not meet the criteria in subparagraph 6(1)(b)(vii) of the Act since they are for expenses within XXXXX (note that subparagraph 6(1)(b)(vii) of the ITA requires, among other things, that the allowance must have been received by the employee: "... for travelling away from the municipality where the employer's establishment at which the employee ordinarily worked or to which the employee ordinarily reported was located ...").
The GST consequences are that the requirements provided under paragraph 174(c) of the ETA do not apply to the travel allowance described in 1a) above since the allowance has been determined by ITR&I not to be an allowance described in subparagraph 6(1)(b) (v), (vi), (vii) or (vii.1) of the ITA (we also assume that the 1a) allowance would not be included in one of the stated subparagraphs if the allowance were a reasonable allowance for the purposes of that subparagraph). As a result, provided that the conditions described in paragraphs 174(a) and (b) of the ETA are satisfied (as explained above), the employer will be deemed to have paid, at the time the 1a) allowance is paid, tax in respect of the supply of property or services equal to the amount determined under paragraph 174(f) of the ETA.
Accordingly, the employer will be entitled to an input tax credit in respect of the deemed tax paid on that particular allowance if all the other ETA conditions are satisfied. Furthermore, if it is determined that the employer is entitled to an input tax credit in respect of the 1a) allowance, and that the taxable supplies for which the allowance is paid are for food, beverages and entertainment, the recapture rules under subsection 236(1) of the ETA may apply.
Paragraph 174(c) of the ETA - amounts described in 1b) above:
With respect to the allowances described in 1b) above, ITR&I's letter on page 2, under the heading "Item 2 of your letter", indicates that: "... it is not clear that the amounts in b) above are allowances for travel expenses for purposes of subparagraph 6(1)(b)(vii) since paragraph XXXXX of the agreement states that they are paid 'as a total expense remuneration'. More information would be required to determine if the allowance in b) above is for travel expenses other than for the use of a motor vehicle." (note also that subparagraph 6(1)(b)(vii) of the ITA does not apply to allowances paid for the use of a motor vehicle).
Since an income tax determination cannot be provided, it is therefore not apparent at this time whether, for GST purposes, the conditions under paragraph 174(c) of the ETA apply to 1b) allowances. If the additional information provided by the employer indicates that the 1b) allowance is in fact an allowance other than for the use of an automobile, then subparagraph 6(1)(b)(vii) of the ITA applies to the allowance (unless the allowance is determined to be for expenses within XXXXX and, accordingly, the requirements under paragraph 174(c) of the ETA must be satisfied (in addition to the conditions under paragraphs 174(a) and (b) of the ETA) to deem the employer to have paid the tax in respect of the allowance.
Please note, however, that if it is determined that the 1b) allowance is for the use of a motor vehicle (therefore, not an allowance under subparagraph 6(1)(b)(vii) of the ITA), that allowance will then be considered to be an allowance to which subparagraph 6(1)(b)(vii.1) of the ITA would have applied (i.e., an allowance received by an employee for the use of a motor vehicle) if the allowance would have been a reasonable allowance. Since the 1b) allowance will be considered unreasonable in this case (by reason of subparagraph 6(1)(b)(x) of the ITA which deems an allowance not to be reasonable where the measurement of the use of the vehicle is not based solely on the number of business kilometres - also mentioned in ITR&I's letter, page 2, - XXXXX), the allowance will not satisfy the reasonableness test under paragraph 174(c) of the ETA and no input tax credit will be available to the employer on that particular allowance.
Paragraph 174(c) of the ETA - amounts described in 1c) and 1d) above:
Lastly, ITR&I's letter states on page 2 - XXXXX that: "Paragraph XXXXX of the agreement states that the amounts in c) and d) above are to provide reasonable compensation for food, shelter and incidental expenses. Such expenses would usually qualify for "travel expenses" for the purpose of subparagraph 6(1)(b)(vii) of the Act." Their letter further explains on page 3 that: "It is a question of fact as to whether allowances for travel expenses ... are reasonable" (also refer to their letter for information on the suggested method to determine the reasonableness of an allowance).
For GST purposes, provided that the 1c) and 1d) allowances are determined to be reasonable allowances at the time they are paid, and the conditions described in paragraphs 174(a) and (b) of the ETA are satisfied, the employer will be deemed to have paid, at that time, tax in respect of the supply of property or services for which the allowances were paid, equal to the amount determined under paragraph 174(f) of the ETA. Accordingly, the employer will be entitled to an input tax credit in respect of the deemed tax paid on the 1c) and 1d) allowances as long as the employer has satisfied all the other ETA conditions to claim such a credit. Also note that since these allowances are paid in part for the supply of food, the recapture rules under subsection 236(1) of the ETA may apply to that supply.
To summarize, we therefore say that all the amounts paid by the employer pursuant to article XXXXX of the agreement are considered to be allowances for GST purposes which amounts would likely be deductible by the employer for income tax purposes. With respect to the reasonableness of those allowances discussed in paragraph 174(c) of the ETA, the conditions under that paragraph:
• do not apply to 1a) amounts described above; and
• apply to 1b), 1c) and 1d) amounts described above (note however that if the amount in 1b) is determined to have been paid for the use of an automobile, the allowance will be deemed to be unreasonable).
Accordingly, provided that all the conditions above are satisfied, and the allowances are paid for supplies all or substantially all of which are taxable supplies (other than zero-rated supplies) of property or services acquired in Canada by the employee, or for the use in Canada of a motor vehicle in relation to the activities engaged in by the employer, the employer will be deemed to have paid, at the time those allowances are paid, tax in respect of the supplies equal to the amount determined under paragraph 174(f) of the ETA.
Lastly, referring to your comments included with the draft letter - specifically, the tax status of employee accommodations, we would like to point out that a supply by way of lease of a residential unit for a period of at least one month is not exempt from tax where the residential unit is not part of a "residential complex" unless the consideration for the supply does not exceed $20 for each day of occupancy. Hotels, motels, inns, boarding houses, lodging houses or similar premises are generally excluded from the definition of "residential complex" for GST purposes (refer to its definition in subsection 123(1) of the ETA). Therefore, where a supply is made by way of lease of a residential unit in a building which is excepted from the definition of "residential complex", that supply will be considered to be a taxable supply (other than a zero-rated supply) irrespective of the length of the lease period provided the consideration for the supply exceeds the above daily limit.
Please note that all the foregoing comments and conditions will also apply in circumstances where the allowance is paid by the employer to an employee for supplies made in participating provinces (under the Harmonized Sales Tax).
We request that the draft reply to XXXXX be amended accordingly. If you require further information, please contact the undersigned at (613) 954-9700.
Yours truly,
Paul Lafond
Rulings Officer, General Operations Unit
General Operations and Border Issues Division
GST Rulings and Interpretation Directorate
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