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: (1) Mr. A is an employee and the sole shareholder of Opco, an Ontario corporation. Mr. A owns his own home and incurs mortgage interest expenses, property taxes, insurance as well as maintenance costs (e.g., electricity, heat). A relevant portion of the maintenance costs are deductible by virtue of subparagraph 8(1)(i)(iii) of the Income Tax Act (the "Act"). However, as an alternative, Mr. A may be reimbursed by Opco in respect of the maintenance costs as well as the mortgage interest expenses, property taxes, and insurance. Does the reimbursement of mortgage interest expenses, property taxes, and insurance give rise to a taxable benefit under paragraph 6(1)(a) of the Act? (2) A second concern is that if Opco reimburses Mr. A in respect of capital outlays (costs incurred by Mr. A to build an office in his basement), would this reimbursement give rise to a taxable benefit under paragraph 6(1)(a) of the Act or subsection 15(1) of the Act?
Position: 1. A taxable benefit would arise. It is a question of fact whether the benefit would arise under subsection 15(1) of the Act or paragraph 6(1)(a) of the Act. Generally, paragraph 6(1)(a) of the Act would be applicable if the portion of the reimbursement in respect of the amount of the benefit where the benefits are not of an exceptional nature and if the sum of the benefits and the employee's salary do not constitute an unreasonable payment for his or her services. 2. General comments were provided
Reasons: 1. This is a reimbursement of non-deductible expenses. The position is also considered to be consistent with paragraph 23 of IT-470R which indicates that a reimbursement in respect of tools gives rise to a taxable benefit. 2. The determination of this issue in an actual situation can only be determined on a case-by-case basis.
XXXXXXXXXX 1999-001395
M. Eisner
February 3, 2000
Dear XXXXXXXXXX:
Re: Home Office Expenses and Employees
This is in reply to your letter received on November 30, 1999 concerning the above-noted subject, in the following hypothetical situation.
Opco is a company incorporated in Ontario. Mr. A, who is a salaried employee and the sole shareholder of Opco, is a Canadian resident. Mr. A owns his own home and incurs mortgage interest, property taxes, insurance, maintenance costs, and telephone expenses. Mr. A is entitled to claim work space in the home expenses pursuant to section 8 of the Income Tax Act (the "Act"). He may receive a reimbursement from Opco in respect of such expenses as well as for other personal expenses that are not otherwise deductible under section 8 of the Act.
You have asked us whether the reimbursement to Mr. A would be a deductible expense of Opco and not a taxable benefit in the hands of Mr. A. A second concern is that if Opco reimburses Mr. A for capital outlays incurred by Mr. A (costs incurred to build an office in Mr. A's basement), would this reimbursement give rise to a taxable benefit under paragraph 6(1)(a) of the Act or subsection 15(1) of the Act?
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments that are not binding on the Canada Customs and Revenue Agency.
It is our general view that to the extent that the reimbursement relates to expenses that could otherwise be deducted by Mr. A by virtue of subparagraph 8(1)(i)(iii) of the Act, it would not give rise to a taxable benefit. It will, however, reduce the expenses that Mr. A may claim thereunder. To the extent that a reimbursement relates to non-deductible expenses, it is our general view that this would give rise to a taxable benefit under paragraph 6(1)(a) of the Act. We note that this latter position is consistent with paragraph 23 of Interpretation Bulletin IT-470R "Employees' Fringe Benefits", which indicates that where an employer makes payments to its employees to offset the cost of tools they are required to have in order to perform their work, the amount of the payment must be included in the employee's income. On the basis that the benefit is taxable under paragraph 6(1)(a) of the Act, the benefit is not of an exceptional nature, and the sum of the reimbursement and the employee's salary constitutes a reasonable payment for the employee's services, it is our view that the employer is normally entitled to deduct such expenses in computing business income.
In the case of the second issue, it is clear that Mr. A would receive a taxable benefit as a result of the reimbursement of costs that are capital in nature. In determining whether paragraph 6(1)(a) of the Act or subsection 15(1) of the Act is applicable, we suggest a review of Interpretation Bulletin IT-432R2, Benefits Conferred on Shareholders, may be helpful. In the scenario outlined, a key consideration will be whether there is a bona fide business transaction as set out in paragraph 5 of the bulletin.
The tax consequences of an actual situation can only be determined on a case-by-case basis following a review of all the relevant facts and documentation. We trust that these comments will be of assistance.
Yours truly,
John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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