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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation]
determine whether an allowance paid under an internship program qualifies for tax treatment under subparagraph 6(1)(b)(iii).
Position: perhaps for part of the allowance, if the facts support our interpretation.
Reasons: Most of the allowance is not to enable the taxpayer to meet additional personal expenses necessitated by a transfer or assignment abroad.
September 14, 2000
CPP/EI Eligibility Division Headquarters
Field Services Section P.-A. Sarrazin
(613) 952-5803
Attention: Claude Paquette
2000-003579Living allowance
This is in response to your memo of July 4, 2000, in which you asked for our opinion on the above subject.
The Facts
You have submitted a document for our review, which is a tripartite agreement for the seconding of services between XXXXXXXXXX a taxpayer and a foreign organization referred to as the “partner”. Among other things, the document describes the obligations of XXXXXXXXXX and the taxpayer. The contract has a term of XXXXXXXXXX years, during which the taxpayer will perform certain functions in XXXXXXXXXX. The taxpayer may terminate the contract with XXXXXXXXXX months' notice for just and sufficient cause, failing which XXXXXXXXXX would not pay the taxpayer's repatriation expenses or the reinstatement grant and could even require the taxpayer to pay compensation of $XXXXXXXXXXX if the taxpayer left to accept other employment. Under the terms of the contract, the partner is the taxpayer's employer. A monthly “living allowance” is paid to the taxpayer by XXXXXXXXXX and is calculated on the basis of (1) a basic amount based on the cost of living in Canada and (2) an equalization allowance designed to adjust the basic amount by taking into account indices for the country of assignment. The taxpayer also receives furnished accommodation and benefits from a life insurance and accident and disability insurance plan, in addition to being reimbursed by XXXXXXXXXX for certain medical, surgical and hospitalization expenses that the taxpayer may incur.
You wish to obtain our opinion as to the sections of the Income Tax Act (the “Act”) under which the taxpayer should include the living allowances received XXXXXXXXXX. Among other things, you requested our opinion on the applicability or non-applicability of subparagraph 6(1)(b)(iii) of the Act.
Income from an office or employment includes, among other things, salary, wages and other remuneration under subsection 5(1) and the value of board, lodging or other benefits received in respect of employment, as well as allowances for personal or living expenses or for any other purpose under subsection 6(1). In Blanchard v. Canada, 95 DTC 5479, Linden J. stated:
“The notion of “remuneration”, however, encompasses only those payments flowing from an employer to an employee for services rendered or work performed. It does not encompass other gains or advantages not directly classifiable as remuneration but arising, nonetheless, out of the taxpayer's employment. To capture these items, various inclusion provisions were added.”
The decision in A.G. of Canada v. MacDonald, 94 DTC 626 is also along the same lines. Since in the present case the allowances are not paid by the employer in consideration for services rendered, we are of the view that the provisions of subsection 6(1) are applicable. The value of the furnished accommodation provided to the taxpayer is included under paragraph 6(1)(a), while the monthly living allowance is included under paragraph 6(1)(b) subject to subparagraphs 6(1)(b)(i) to (ix).
As stated in subparagraph 6(1)(b)(iii), an allowance is not included as income from an office or employment if it represents a representation or other special allowances received in respect of a period of absence from Canada as a person described in paragraph 250(1)(b), (c), (d) or (d.1). A representation allowance, in the context of subparagraph 6(1)(b)(iii), is an allowance paid to an employee who is required to perform duties in a foreign country, in order to alleviate the inconvenience of relocation, adjustment to different living conditions and, where applicable, an increased cost of living. An amount can generally be considered a representation allowance where it is paid to an employee who is transferred or posted abroad and incurs additional expenses as a result. In our view, the amount corresponding to the basic allowance paid by XXXXXXXXXX in this case would not constitute such an allowance. As for the equalization allowance, the facts surrounding its calculation and the purpose for which it was paid are insufficient for us to determine whether it is a special allowance within the meaning of subparagraph 6(1)(b)(iii).
Furthermore, given that the contract is for a period of XXXXXXXXXX years and therefore seems to concern work of a temporary nature, subsection 6(6) could apply to the amount of the value of the accommodation and to part of the monthly allowance and thus exclude them from the taxpayer's income. Subsection 6(6) states that certain amounts enjoyed by the taxpayer or certain allowances paid to the taxpayer for board and lodging expenses and for travel expenses incurred during a given period at a special work site are excluded from the taxpayer's income.
The purpose of this exception is to recognize that where an employee is required to work on a temporary basis at a work location that is a significant distance from the employee's usual place of residence, it would not be reasonable to expect the employee to dispose of the employee’s current residence and move to the new location for a short period of time. In addition, this paragraph recognizes that where an employee continues to incur expenses in order to maintain the employee’s principal place of residence without receiving rental income in return, a benefit is not provided if the employer makes available, or reimburses, the expenses incurred in connection with a temporary residence at the particular work site.
Subparagraph 6(6)(a)(i) of the Act exempts the value of benefits and allowances for board or lodging if all of the following requirements are satisfied:
1. The allowance must be reasonable;
2. The duties performed by the employee at the special work site were of a temporary nature;
3. The employee maintained at another location a self-contained domestic establishment as the employee’s principal place of residence
(a) that was, throughout the period, available for the employee’s occupancy and not rented by the employee to any other person, and
(b) to which, by reason of distance, the employee could not reasonably be expected to have returned daily from the special work site, or
4. The period during which the duties were performed by the employee required the employee to be away from the taxpayer’s principal place of residence, or to be at the special work site or location, was not less than 36 hours.
Whether an allowance is reasonable is a question of fact that can only be resolved after an examination of all the facts surrounding a particular situation. Generally, to be reasonable, an allowance must be comparable to the actual expenses it covers.
In the situation you have presented to us, the second condition, among others, must be satisfied. Although the Act does not define the term “temporary”, the Agency's position on this term is set out in paragraph 6 of Interpretation Bulletin IT-91R4, Employment at a Special Work Site or Remote Work Location. As a general rule, duties will be considered to be of a temporary nature if it can reasonably be expected that they will not provide continuous employment beyond a period of two years.
A third condition for the application of subparagraph 6(6)(a)(i) is that the employee maintained a self-contained domestic establishment elsewhere as the employee’s principal place of residence. In our view, in the context of that subparagraph, the term “maintained” must be interpreted as meaning “incurred expenses in respect of the self-contained domestic establishment (residence)”. According to subsection 248(1), a self-contained domestic establishment means a dwelling-house, apartment or other similar place of residence in which place a person as a general rule sleeps and eats. A residence is considered to be a self-contained domestic establishment if it is a residential unit with restricted access and is equipped with a kitchen, bathroom and sleeping area. However, the following are not normally considered to be self-contained domestic establishments: one or more hotel rooms, a dormitory, a room in a boarding house and a service barrack. Thus, a trainee who normally lives with their parents would not have a self-contained domestic establishment. Consequently, the allowances received by such a trainee would be taxable because they would not meet the test set out in subparagraph 6(6)(a)(i).
With respect more specifically to travel benefits or allowances, paragraph 6(6)(b) excludes from an individual's income the value of the benefit and reasonable allowances received by the individual for transportation between the principal place of residence and the special work site for the period referred to in 4 above if, for that period, the employee received board and lodging, or a reasonable allowance in respect of board and lodging, from the employer. Any other allowances paid in respect of travel for personal purposes at the place of work placement should be included in an employee's income.
To do so, the taxpayer would have to identify a reasonable portion of the monthly allowance relating specifically to meal (board) or travel expenses. In addition, all the other conditions necessary for the application of that paragraph must be satisfied. Among other things, the employee would have to have maintained, elsewhere than in XXXXXXXXXX, a self-contained domestic establishment as the employee’s principal place of residence
For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the Legislative Access Bank version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope you find these comments of assistance.
Ghislain Martineau
for the Director
Business and Publications Division
Income Tax Rulings Directorate
5
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