17 December 2002 GST/HST Ruling 35933 - "Per Diem" Allowances and Section 174 of the Excise Tax Act (ETA)

Dear XXXXX:

Thank you for your letters of XXXXX and XXXXX XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to per diem allowances. In those letters, you were following up on our earlier application ruling of XXXXX issued to XXXXX.

You previously had contracted with XXXXX to apply for the earlier application ruling, on behalf of your client XXXXX ("XXXXX"). Due to other commitments, XXXXX was unable to follow-up on this matter.

Statement of Facts

(1) For purposes of this ruling, reference is to be made to the facts presented in our earlier ruling identified by case XXXXX dated XXXXX.

(2) XXXXX paid out a XXXXX/day allowance to certain employees who surrendered their camp privileges to help cover their living expenses.

(3) These living expenses have different tax statuses for GST/HST purposes as follows:

Fuel, Travel, Incidentals & Laundry

Rulings Requested

For purposes of section 174 of the Excise Tax Act (ETA):

(1) The XXXXX/day allowance paid by XXXXX is a subsistence allowance;

(2) The allowance in question can be treated as two distinct subsistence allowances, one a XXXXX/day allowance for GST taxable items and the other, a XXXXX/day allowance contributing towards zero-rated/exempt items;

(3) XXXXX may claim input tax credits with respect to the deemed tax paid on the XXXXX/day allowance for GST taxable items.

Ruling Given

Based on our understanding of the facts set out above, and in case XXXXX, we confirm our previous ruling that the deeming provisions under section 174 of the ETA will not apply to the XXXXX per diem allowance in question.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

We are unable to rule as to whether or not an amount is a subsistence allowance or not. Whether an amount is a subsistence allowance is a question of fact. In our view, a subsistence allowance is intended to cover hotel, incidentals and meals. In the revised itemized list that you have provided, you identify a number of other items as also being included in the amount in question.

We cannot agree to your request to retroactively split the per diem amount into two components, one to cover GST/HST exempt and zero-rated items, and one to cover GST/HST taxable items. You have indicated that the amount was paid as one allowance. There is no legislative mechanism provided in section 174 of the ETA to apportion an allowance into component parts, such that the component that consists of 7% or 15% taxable supplies would be subject to the formula in section 174 of the ETA, while the remainder would not.

The current GST/HST policy (Policy P-075 Allowances and Reimbursements) is that for purposes of section 174 of the ETA, the term "allowance" is interpreted to have the same meaning as it has for income tax purposes. An allowance is 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. To be considered to be an allowance, the amount must meet all of the following criteria:

•   The amount paid must be limited and predetermined,

•   The amount must be paid to enable the person receiving the allowance to discharge a certain type of expense,

•   The amount must be at the complete disposition of the person receiving the allowance (e.g., the employee), and

•   There is no requirement for the person receiving the allowance to repay or account for the use of the amount. That is to say, the person receiving the allowance does not have to demonstrate that the amount was actually spent.

Since an allowance is at the complete disposition of the employee receiving the payment, and there is no requirement to repay or account for the use of the money, the CCRA would look at the purpose of the allowance to determine whether the allowance would comply with the requirement in subparagraph 174(a)(iv) of the ETA. The requirement in that subparagraph is that 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 this instance) in relation to activities engaged in by the employer.

Where sufficient information has been obtained, calling into question the intent and purpose of an allowance, the onus is on the person paying the allowance to demonstrate that it was reasonable to consider that the allowance was for a particular purpose. As such, while it is not necessary to demonstrate that the employees who were in receipt of an allowance actually used the allowance for the particular purpose for which it was paid, it is necessary to demonstrate that the allowance could reasonably have been used for that intended purpose.

Some factors that may help demonstrate that an allowance was intended for certain expenses, such as short-term accommodation, may include the fact that the amount of the allowance was adequate for an employee to purchase that accommodation, and that there was enough of that type of accommodation in the area for the number of employees looking for accommodation. Where the amount of the allowance could not reasonably be considered adequate to discharge a certain type of expense, we may question whether the allowance was for the stated purpose.

If, for example, a company paid an employee a per diem allowance, but had a policy whereby it would pay/reimburse hotel and meal expenses, in the absence of information to the contrary, such a policy might reinforce the idea that the per diem allowance was not intended to cover the cost of hotel accommodation and restaurant meals, but was for some other purpose.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-9699 or Owen Newell, Manager of the General Operations Unit at (613) 952-0301.

Yours truly,

Douglas Wood, CGA
Rulings Officer
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate