30 June 2000 External T.I. 2000-0032155 - MUNICIPAL OFFICER EXPENSE ALLOWANCE

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. Can retiring allowances be used in the determination of a municipal officer's tax-free expense allowance?

2. Will any portion of a retiring allowance that is based on the tax-free allowance received as part of an officer's remuneration also be tax-free?

Position:

1. No.

2. No.

Reasons:

1. The Agency's policy position on the calculation of tax-free expense allowances is based on our understanding that the amount would be calculated with respect to remuneration and non-accountable expense allowances received in a year which specifically relate to the services performed and/or the expenses incurred in the year in the performance of those services. It was not envisioned that the 81(3) tax exemption would be based on amounts paid as a retiring allowance. A retiring allowance does not fit into the intended meaning of the term "salary or [other] remuneration" as the term is used in that provision or as contemplated for the purposes of applying the Agency's policy position.

2. The basis on which a retiring allowance is determined does not limit its taxability.

XXXXXXXXXX 2000-003215
W. C. Harding
Attention: XXXXXXXXXX

June 30, 2000

Dear Sirs:

Re: Taxability of Retiring Allowance for Elected Officials

This is in reply to your facsimile of June 15, 2000, in which you sent us a copy of your letter of May 26, 2000, addressed to the XXXXXXXXXX Tax Service Office. Please note that we have contacted the XXXXXXXXXX office and advised them that we will reply to your inquiry.

In your letter you indicate that elected officials of the municipality may receive a retiring allowance when they leave office, equal to one month's gross salary for each year of service (to a maximum of 6 months salary). You also indicate that the annual gross salary used in this calculation will include any expense allowance received in the year including any portion that is excluded in the calculation of income for tax purposes by virtue of subsection 81(3) of the Income Tax Act (the "Act"). You then asked if a portion of the retiring allowance could also be received on the same tax-free basis.

It appears to us that your inquiry can be restated in the form of two distinct questions.

1. Can a retiring allowance be used in the determination of a municipal officer's tax-free expense allowance under subsection 81(3) of the Act and if so will a portion of the retiring allowance be treated as a tax-free expense allowance? and

2. Will any portion of a retiring allowance that is based on a tax-free allowance previously received as part of an officer's remuneration, also be tax-free?

To clarify these questions and our answers we will use the following example. Assume a municipal officer has received a fixed annual salary of $60,000 and an annual expense allowance of $12,000 for the last two years of employment. During the last year of employment the officer retires and also receives a retiring allowance of $36,000.

1. Calculation of annual tax-free expense allowance.

Paragraph 6 of the Agency's Interpretation Bulletin IT-292, Taxation of Elected Officers of Incorporated Municipalities, School Boards, Municipal Commissions and Similar Bodies, explains the Agency's policy on the calculation of tax-free allowances under subsection 81(3) of the Act when a provincial Municipal Act deems a portion of an officer's remuneration to be an expense allowance. Basically, the Agency takes the position that the portion deemed to be an expense allowance under the applicable Municipal Act may be treated as an expense allowance for purposes of the Income Tax Act and not as any other form of remuneration, to the extent the allowance does not exceed 1/3 of the total amount paid (as calculated under paragraph 3 of the bulletin) to the officer in the year and in respect of the officer's position.. Section 255 of the Municipal Act of Ontario, which applies to your situation, provides that one third of any salary, indemnity, allowance or other remuneration paid to a member of a council of a municipality or a local board shall be deemed to be for expenses incidental to the discharge of the officer's duties.

In terms of the above example, the tax-free expense allowance paid in the year prior to the year of termination would be calculated as 1/3 of the total of the officer's salary for the year and the actual expense allowance paid in the year or $24,000 (1/3 of 60,000+12,000). On the other hand, in the final year of employment, the officer will also be paid the retiring allowance of $36,000. A retiring allowance is generally considered to be a form of remuneration. Accordingly, under the Municipal Act it appears that the amount could be included in the calculation of the expense allowance. We have not been able to determine if provincial authorities would accept this interpretation. Nevertheless, for purposes of the Income Tax Act, we are of the opinion that the tax-free portion of any allowance would still be limited to 1/3 of the total amount calculated under paragraph 3 of the IT Bulletin that was paid to the officer in the year in respect of services rendered in the year and that this amount would not include the retiring allowance. To summarize, in our example, the expense allowance could be calculated under the Municipal Act as 1/3 of the total amount of remuneration received including the retiring allowance or $36,000. However, the tax-free amount would still be limited to $24,000 as previously computed for the preceding year.

2. Taxable portion of a retiring allowance

The second question posed relates to the taxability of a retiring allowance where it is based, in part, on amounts that were previously received tax-free. In our example, the officer receives a retiring allowance of $36,000 or 6 months gross salary. However, this gross salary includes $12,000 which was 6 times the $2000 received each month as a tax-free expense allowance. This then raises the question of whether this portion of the retiring allowance would also be tax-free.

As noted above the retiring allowance cannot be included in the calculation of the exempt amount calculated under subsection 81(3) of the Act. We can also advise that the Act does not provide for any exclusion from income of any portion of a retiring allowance which is based on amounts that were previously excluded from income by virtue of subsection 81(3) of the Act. Accordingly, the total amount of the retiring allowance must be included in the recipient's income in accordance with the provisions of subparagraph 56(1)(a)(ii) of the Act.

We trust these comments will be of assistance to you.

Yours truly,

P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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