12 February 1999 GST/HST Interpretation HQR0001551 - Travel Allowances - Section 174 of the Excise Tax Act (ETA)

Dear XXXXX

Thank you for your recent telephone call and facsimile messages of December 2, 1998, and January 25, 1999, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to flat rate travel allowances as well as allowances paid to employees for meals and accommodation. I apologize for the delay in responding in writing to your questions.

Background Information

As I understand from your facsimile messages and our recent telephone conversations:

•   Employees work on XXXXX all over Canada, including remote areas, and are sometimes required to stay overnight.

•   Employees are paid a flat rate travel allowance by a registrant employer for the use of a motor vehicle. The amount of the allowance varies (e.g., $35 - $45 per day) depending upon whether or not the employee's vehicle is a "4 x 4", and whether or not the vehicle has a phone.

•   The flat rate travel allowances paid to employees for the use of a motor vehicle in Canada relating to the activities of the employer are not based solely on the number of kilometres for which the employees' vehicles are used in connection with or in the course of the office or employment of employees.

•   Employees are also paid a flat meal and accommodation allowance per day.

Interpretation Requested

You would like to know whether a registrant employer would be entitled to claim input tax credits with respect to allowances paid to employees for meals, travel, and accommodation.

If the registrant employer is entitled to claim input tax credits with respect to the allowances, to what extent may it do so?

Interpretation Given

You identified two types of allowances and the specific purposes for which they were paid to employees. The first allowance is paid to employees at a flat rate for the use of a motor vehicle. The second allowance has two identified purposes and is paid for meals and accommodation.

The Department's policy P-075 defines an allowance as "any periodic or other payment that an employee receives from an employer, in addition to salary and wages, without having to account for its use". An amount constitutes an allowance for the purposes of section 174 of the Excise Tax Act (ETA) where the amount meets all of the following criteria:

•   the amount must be limited and predetermined;

•   the amount must be paid to enable the recipient to discharge a certain type of expense;

•   the amount must be at the complete disposition of the recipient;

•   there is no requirement to repay or account for the use of the amount. The recipient does not have to demonstrate that the amount was spent (i.e., provide receipts or documentation substantiating that the amount was spent).

Section 174 of the ETA may apply where an employer pays an allowance to an employee for supplies all or substantially all (i.e., 90% or more) 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. Section 174 of the ETA may also apply where an employer pays an allowance to an employee for the use in Canada of a motor vehicle which is in relation to the activities engaged in by the employer.

Basically, where section 174 of the ETA applies, the employer who paid the allowance is deemed to have received a supply of the property or service, and any consumption or use of the property or service by the employee is deemed to be consumption or use by the employer and not by the employee, and the employer is deemed to have paid, at the time the allowance is paid, tax in respect of the supply.

For section 174 of the ETA to apply, an amount in respect of the allowance must be deductible in computing the employer's income for a taxation year of the employer for the purposes of the Income Tax Act (ITA), or would have been so deductible if the employer were a taxpayer under the ITA and the activity were a business.

In determining whether or not an amount is, or would be deductible for the purposes of the ITA, section 67 of the ITA provides that in computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under the ITA, except to the extent that the outlay or expense was "reasonable" in the circumstances.

Since one of the allowances you identified was paid to employees for the use of a motor vehicle, it would be appropriate to look at subparagraph 174(c)(i) of the ETA. Subparagraph 174(c)(i) of the ETA provides that in the case of an allowance for the use of a motor vehicle in connection with or in the course of the employee's employment, to which subparagraph 6(1)(b)(v), (vi), (vii) or (vii.1) of the ITA would apply, the allowance must be a "reasonable allowance" for the purposes of that subparagraph.

Pursuant to subparagraph 6(1)(b)(x) of the ITA, for the purposes of subparagraphs 6(1)(b)(v), (vi), and (vii.1) of the ITA, any allowance for the use of a motor vehicle will be considered "reasonable" only if it is based on the number of kilometres for which the vehicle is used in connection with the employer's activities. You stated that in your client's situation, allowances were not paid to the employees based solely on the number of kilometres for which the vehicles were used in connection with the employer's activities.

Although the "reasonableness" of an allowance is normally decided based upon the facts of each situation, the Department will, as a general rule, accept as a "reasonable allowance", an allowance based upon the maximum prescribed rates of 35 cents for the first 5,000 kilometres, and 29 cents per kilometre for each additional kilometre. For the Yukon and North West Territories, the tax-exempt allowance will continue to be 39 cents for the first 5,000 kilometres driven, and 33 cents for each additional kilometre.

Where an employer pays a travel allowance to an employee for the use of a motor vehicle and the allowance is not regarded as being "reasonable", the employer will not be deemed to have paid tax with respect to the allowance under section 174 of the ETA. As such, the employer would not be entitled to an input tax credit with respect to such a motor vehicle allowance.

With respect to the second allowance you identified which is paid to employees for meals and accommodation, my comments are as follows:

Basically, when the deduction for income tax purposes with respect to food, beverages and entertainment is limited to 50%, then 50% of the GST/HST paid or payable on deductible meals and entertainment which had been claimed as an input tax credit is subject to recapture. This rule does not apply to charities or public institutions which are entitled to a full input tax credit for the GST/HST paid or payable on food, beverages and entertainment.

The employer may choose one of two ways to calculate their input tax credits to account for the 50% adjustment:

•   Claim 100% of the GST/HST paid or payable on these expenses as an input tax credit throughout the fiscal year. If the employer files monthly or quarterly GST/HST returns, add 50% of the input tax credits claimed during the year to their net tax calculation for the first reporting period immediately after the end of the fiscal year. If the employer files annually, they should add 50% of their input tax credits claimed as an adjustment to their net tax calculation for the fiscal year.

or

•   Claim 50% of the actual GST/HST paid or payable on these expenses during each reporting period. By choosing this method, the employer will not be required to make the 50% adjustment at the end of their fiscal year.

You mentioned in your fax of December 2, 1998, that employees were required to stay on occasion at "remote work locations". Paragraph 67.1(2)(d) of the ITA provides that subsection 67.1(1) does not apply to an amount paid or payable by a person in respect of the consumption of food, beverages or the enjoyment of entertainment where the amount is required to be included in computing the income of an employee of the person or would be so required but for subparagraph 6(6)(a)(ii) of the ITA.

Basically, subparagraph 6(6)(a)(ii) of the ITA provides that the value of amounts, or an allowance paid to an employee in relation to expenses incurred while at a "remote work location" for a period of not less than 36 hours shall not be included in the employees income for income tax purposes. Where subsection 67.1(1) of the ITA does not apply (i.e., such as is the case where the "remote work location" exception applies), the employer would not be subject to the recapture rules with respect to food, beverages or entertainment provided for under subsection 236(1) of the ETA.

The December 10, 1998, Notice of Ways and Means Motion to amend the ITA has proposed that the provisions relating to the deductibility of expenses for food, beverages or entertainment be modified, for expenses incurred after February 23, 1998. It proposes that the exceptions found under subsection 67.1(2) of the ITA be extended to include expenses that would be required to be included in computing the income of an employee but for subparagraph 6(6)(a)(i) of the ITA, and are incurred in respect of employees working at "special work sites" which are at least 30 kilometres away from the nearest urban area having a population of at least 40,000 persons.

The significance of this proposed amendment is that, where subsection 67.1(1) of the ITA does not apply because of the proposed "special work site" exception, the employer would not be subject to the recapture rules with respect to allowances paid for food, beverages or entertainment provided for under subsection 236(1) of the ETA.

Whether or not a particular location or site qualifies as a "remote work location", or "special work site" for the purposes of subsection 6(6) of the ITA is an income tax determination. Should you have any further question regarding "remote work locations" and "special works sites", I suggest that you review Income Tax Interpretation Bulletin IT-91R4, or contact your local Tax Services Office.

In conclusion, the registrant employer may be entitled to input tax credits with respect to the allowances you identified, subject to the tax being deemed paid by the employer under section 174 of the ETA, and subject to the requirements and restrictions with respect to input tax credits.

Input tax credits relating to the portion of the allowance for food, beverages or entertainment may be subject to recapture. As well, there would be no input tax credit entitlement with respect to an allowance paid to an employee for the use of a motor vehicle which was not based solely on the number of kilometres for which the vehicle was used in connection with the employer's activities.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-9699.

Yours truly,

Douglas Wood
A/Rulings Officer
General Operations Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate