18 September 2008 External T.I. 2008-0274361E5 - Employee Living Allowances

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.

Principal Issues: Are the monthly living allowances paid by the Employer to its employees for work at a particular Facility excluded from income under subparagraph 6(6)(a)(i) of the Act or are the employees entitled to a residency deduction under paragraph 110.7(1)(b) of the Act?

Position: Question of fact to be determined on a case-by-case basis. Depending on the circumstances, the monthly living allowance may qualify for the special work site exclusion under subparagraph 6(6)(a)(i) or the employees may be entitled to a residency deduction under paragraph 110.7(1)(b).

Reasons: The law.

XXXXXXXXXX 								2008-027436
									Michael Cooke
September 18, 2008

Dear XXXXXXXXXX :

Re: Taxability of a living allowance and transportation costs

We are writing in response to your correspondence of April 4, 2008, concerning the application of the special work site income exclusion in subsection 6(6) of the Income Tax Act (the "Act") and the northern residents deduction in section 110.7 of the Act as these provisions may apply to the facts described in your letter and from our numerous telephone discussions (Cooke/XXXXXXXXXX ).

Our understanding of the facts is summarized as follows:

XXXXXXXXXX . (the "Employer") has entered into a XXXXXXXXXX contract with XXXXXXXXXX (the "Company") to provide XXXXXXXXXX services at the Company's XXXXXXXXXX facility (the "Facility") located on its XXXXXXXXXX project which is more than 80 kilometers north of the community of XXXXXXXXXX . The Employer's contract with the Company expires on XXXXXXXXXX , and it is not known at this time if this contract will be extended.

The Employer will employ approximately XXXXXXXXXX people at the Facility, each of whom will be required to live in XXXXXXXXXX (the "Employees"). The Employer will pay each Employee a monthly living allowance of $XXXXXXXXXX while working at the Facility.

All Employees are required to travel to the Facility by bus from XXXXXXXXXX . The bus is operated by the Company and the Employer pays the Company a fee of $XXXXXXXXXX per day for each Employee for the bus transportation. The Employer maintains that travel by bus is necessary because of employee safety concerns and because parking at the Facility is limited (the Employer only has XXXXXXXXXX parking spots, one of which is occupied by a mandatory safety vehicle). Some of the Employees have transferred to the Facility from another Employer owned facility (other than the Employer's existing facility in XXXXXXXXXX ). These Employees agreed to work at the Facility for a XXXXXXXXXX period, following which, such Employees expect to return to their original positions with the Employer or an alternate comparable position at that location. In some, but not all, cases, the Employer and Employees have agreed to the above-described terms of the transfer in writing.

Other Employees have been newly hired by the Employer to specifically work in the Facility. Many of these employees lived in another town, city or community other than XXXXXXXXXX before they were hired by the Employer. In some cases, such Employees have been hired on a permanent basis (i.e. there is nothing in any written employment contact as to what will happen when the Employer's contract with the Company expires). However, in other cases, the written employment contract may actually specify the circumstances under which the Employer will attempt to find the Employee an alternate comparable position within the Employer at another work location when work at the Facility ceases.

You indicate that it is generally common knowledge among all Employees that the Employer's contract with the Company to provide services at the Facility is only for a XXXXXXXXXX period. As such, the Employer and the Employees consider the work at the Facility to be temporary. As a result, you indicate that many of these Employees continue to maintain a principal residence in a place other than XXXXXXXXXX .

You want to know whether the monthly living allowance paid by the Employer will qualify for the special work site exclusion or whether the Employees are entitled to a residency deduction under paragraph 110.7(1)(b) of the Act in the above circumstances. In addition, you ask whether the bus transportation costs paid by the Employer to transport the Employees to the Facility would result in a taxable benefit under paragraph 6(1)(a) of the Act.

Our Comments:

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 submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following comments.

Special Work Site Exclusion

In general terms, employer-paid amounts for accommodations, meals and transportation expenses incurred by an individual who is performing the duties of an office or employment at a location that is considered the individual's regular place of work, must be included in the individual's employment income under subsection 6(1) of the Act. However, as you are aware, subsection 6(6) of the Act may apply to exclude from income the value of, or an allowance received in respect of these types of expenses where they are incurred by an employee at a special work site or remote work location. Since you are only concerned with the rules for a special work site our comments will focus on this aspect of subsection 6(6) of the Act.

Subparagraph 6(6)(a)(i) of the Act, states, inter alia, that the "duties performed by the taxpayer at the special work site must be of a temporary nature". As noted in paragraph 5 of IT-91R4, "Employment at Special Work Sites or Remote Work Locations", this term refers to the duration of the duties performed by the individual employee and not the expected duration of the project as a whole. The term "temporary" is not defined in the Act but as noted in paragraph 6 of IT-91R4, we generally accept that 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 two year period. We also indicated in that paragraph that there may be situations where the continuous two year employment period may not be applicable, however, this determination must be made on the basis of the facts known at the commencement of the particular employment.

In this regard, particular consideration must generally be given to the following factors:

• the nature of the duties to be performed by the employee (certain types of work are, by their nature, short term engagements, such as repair work or trades which are involved only during a certain phase of a project);
• the overall time estimated for a project, or a particular phase of a project, on which the employee is engaged to perform duties; and
• the agreed period of time for which the employee was engaged according to the employment contract or other terms of the engagement.

The original intent of the parties as to whether the employee's duties at a particular work site will be of a temporary nature will be an important consideration and one of the best indicia of such intent would be to refer to the terms of the particular employment contract. For example, where it is clear from the terms of the employment contract that the employee is expected to return to his/her substantive position upon completion of the duties at the new location, or that such employee will be provided with another position with the employer at another work location upon the completion of such duties, the fact that the duties at such a location may last more than two years will not, in and of itself, cause us to conclude that such duties are not of a temporary nature.

As such, the fact that an Employee may work at the Facility for XXXXXXXXXX years will not automatically preclude the application of subsection 6(6) of the Act.

However, it should be kept in mind that the fact that an employee may decide to maintain a principal residence in a location other than at the new work location will not, in and of itself, mean that the employee's duties at the new location are of a temporary nature, since the particular employee may have other personal reasons for retaining an existing residence. As such, other corroborating evidence would normally be required to support a conclusion that the employee's duties at the new location are of a temporary nature.

Accordingly, each Employee's situation would need to be determined on a case-by-case basis.

Northern Residents Deduction

The northern residents deductions consist of a deduction in respect of certain travel benefits in paragraph 110.7(1)(a) of the Act (which we are not addressing) and a deduction in respect of living costs in paragraph 110.7(1)(b) of the Act (the "residency deduction") where the taxpayer resides in one or more prescribed zones, throughout a period of at least 6 consecutive months commencing or ending in the year (referred to as the "qualifying period"). For these purposes the prescribed zones are a "prescribed northern zone" or "prescribed intermediate zone" as defined in Regulation 7303.1 of the Act. The residency deduction is equal to the lesser of:

(a) 20% of the individual's income for the year; and

(b) the total of amounts obtained by taking the specified percentage (defined in subsection 110.7(2) as 100% for a prescribed northern zone and 50% for a prescribed intermediate zone) for a particular area and multiplying it by:

• $7.50 (increased to $8.25 for 2008 and subsequent taxation years) for each day in the year in the period in which the individual resided in the particular area; and
• an additional $7.50 (increased to $8.25 for 2008 and subsequent taxation years) for each day in the year in the period that the individual maintained and resided in a self-contained domestic establishment in the particular area and no other individual residing in that establishment claimed a residency deduction for that day.

A self-contained domestic establishment is defined in subsection 248(1) of the Act to mean a dwelling-house, apartment or other similar place of residence in which a person as a general rule sleeps or eats.

As indicated in paragraph 20 of IT-91R4, if an employee maintained a principal place of residence outside a prescribed zone, the employee may still qualify for the northern residents deduction provided the special work site is located in an area which is a prescribed zone and the employee resided in a self-contained domestic establishment at the special work site for at least six consecutive months beginning or ending in the year.

In connection with the above, while XXXXXXXXXX is in a prescribed intermediate zone, whether or not an Employee working at the Facility meets all the particular conditions of paragraph 110.7(1)(b) of the Act for a particular taxation year can only be determined after a review of all of the relevant facts. It is our view that where a taxpayer maintains a self-contained domestic establishment in a prescribed zone but also has a principal residence that is not in a prescribed zone, the taxpayer's ability to claim the northern residents deduction will depend on the number and length of absences from the prescribed zone and the purpose of such absences. Generally speaking, however, in these circumstances short or infrequent absences from a prescribed zone will not cause us to consider that the consecutive six month period has been interrupted. However, if the employee returns to his/her principal residence outside of a prescribed zone on a fairly frequent basis, for example, on most weekends, then the consecutive six month period requirement will not be met.

Given the potential applicability of subsection 6(6) of the Act to some of the Employees, we would also like to point out that in calculating the residency deduction for a particular year, the taxpayer is required to reduce the amount otherwise deductible by the amount of board and lodging benefits or allowances excluded from his/her income under subparagraph 6(6)(a)(i) to the extent required by subsection 110.7(4).

Bus Transportation

Normally, travel between an employee's home (even a temporary residence) and the employer's place of business at which the employee ordinarily reports for work is considered to be personal travel (i.e. not travel in the performance of the duties of the office or employment). As such, employer-paid costs for such personal travel would ordinarily be required to be included in an employee's income as a taxable benefit under paragraph 6(1)(a) of the Act.

However, in the above-noted situation, the bus transportation provided by the Employer would appear to be for reasons described in paragraph 32 of IT-470R, "Employees' Fringe Benefits (Consolidated)" and as such should not result in a taxable benefit to any of the Employees.

We trust our comments will be of assistance.

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch