21 August 2008 External T.I. 2008-0276131E5 - Payments to employees for travel

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: General questions as to when payments to employees for motor vehicle and other travel expenses may be excluded from income.

Position: General information provided. It is a question of fact depending on the circumstances as to whether the payments may be excluded from income as reimbursements of expenses incurred on behalf of the employer or as allowances specifically exempt under the Act. ..

Reasons: CRA published positions.

								2008-027613
XXXXXXXXXX 							Rob Ferrari
(613) 957-2138
August 21, 2008

Re: Payments to employees for motor vehicle and other travel expenses

Dear XXXXXXXXXX :

This is in response to your email of April 23, 2008, wherein you requested our views on amounts paid to employees for motor vehicle expenses and other travel expenses.

We understand that the employer reimburses some employees for these expenses based upon receipts submitted. Other employees receive fixed bi-monthly amounts, although you are uncertain as to how the amounts are calculated or whether there is a subsequent accounting of the payments to the actual costs incurred by the employees. You ask whether these payments are required to be reported as employment income of the employee and what withholding requirements apply.

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.

Our Comments:

Whether amounts paid to employees for motor vehicle and other travel expenses are required to be included in income is a question of fact that can only be determined on a case-by-case basis. The Canada Revenue Agency's ("CRA's") views with respect to amounts paid to employees for these expenses are outlined in paragraphs 40 through 52 of Interpretation Bulletin IT-522R, Vehicle, Travel and Sales Expenses of Employees ("IT-552R"), available on the CRA website at: http://www.cra-arc.gc.ca/E/pub/tp/it522r/README.html. Further information may also be found in T4130, the Employers' Guide Taxable Benefits ("Employers' Guide") available at: http://www.cra-arc.gc.ca/E/pub/tg/t4130/t4130-e.html#P373_28057. However, we offer the following general comments which may be of assistance.

Reimbursements and accountable advances

A reimbursement means a payment by an employer to an employee to repay the employee for amounts spent by the employee on the employer's business. An accountable advance is an amount given by an employer to an employee for expenses to be incurred by the employee on the employer's business and to be accounted for by the production of receipts and the return of any amount not so spent.

A reimbursement or accountable advance received by an employee for motor vehicle expenses and other travel expenses may be excluded from income only where certain conditions are met. As explained in paragraphs 50 and 51 of IT-522R, a reimbursement or an accountable advance for reasonable travel expenses is not income in the hands of the employee receiving it, unless it represents payment of the employee's personal expenses. For example, expenses incurred to travel between an employee's home and his or her regular work location would be considered to be personal.

Because a reasonable reimbursement or accountable advance in respect of legitimate employment-related travel expenses is not income to the employee, the amount need not be reported on the employee's T4 slip.

Allowances

Some of the payments you describe appear to fall within the meaning of an "allowance". Paragraph 40 of IT-522R describes an allowance to mean: "any periodic or other payment that an employee receives from an employer, in addition to salary or wages, without having to account for its use. It may be computed by reference to distance or time (for example, a "motor vehicle" expense allowance based on the distance driven or a travel expense allowance based on the number of days away) or on some other basis." Generally, allowances are required to be included in an employee's income unless specifically exempted under the Act.

Motor Vehicle Allowances

A motor vehicle allowance might be excluded from an employee's income by one of several subparagraphs in paragraph 6(1)(b) of the Act. While it appears that the provision most applicable to employees of your organization would be subparagraph 6(1)(b)(vii.1), all of these provisions require the allowance to be reasonable. To determine if a motor vehicle allowance is reasonable, various considerations arise. If the allowance is not based solely on the number of employment-related kilometres driven, subparagraph 6(1)(b)(x) of the Act will deem it not to be reasonable. Similarly, if the employee receives an allowance in respect of the use of the vehicle and is also reimbursed in whole or in part for expenses in respect of that use the allowance will be deemed not to be reasonable.

In addition to the manner of computing the allowance, the amount paid per kilometre is also relevant to whether the allowance is reasonable. Although normally decided based on the facts of the particular case, the CRA generally accepts that an allowance based on the rates provided for in section 7306 of the Income Tax Regulations is reasonable. The rates for 2008 are 52 cents per kilometre for the first 5,000 kilometres and 46¢ per kilometre thereafter. In the Northwest Territories, Yukon, and Nunavut, there is an additional 4 cent per kilometre for travel. These allowance rates are posted on the CRA website at: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/bnfts/tmbl/llwnc/rts-eng.html.

It should be noted that in some cases, periodic payments to employees may be considered to be calculated solely by reference to the number of kilometres driven in a year in which there is a year-end accounting for such payments. For further information about the conditions under which such payments may be excluded from an employee's income, please see paragraph 44 of IT-522R and the Employers' Guide under the heading Averaging Allowances.

Other travel allowances

Other travel allowances, such as those for meals or accommodation, might be excluded from an employee's income by subparagraph 6(1)(b)(vii) of the Act. (Unless the employee is a salesperson, in which case subparagraph 6(1)(b)(v) of the Act may have application). Subparagraph 6(1)(b)(vii) contains several requirements which must be met in order for an allowance to be exempt from tax:

• The amount of the allowance must be reasonable ;
• The allowance must be received for traveling away from the municipality and the metropolitan area (if there is one) where the employer's establishment, at which the employee ordinarily worked or to which the employee ordinarily reported, is located; and
• The travel expenses must be incurred in the performance of the duties of the office or employment.

Whether an allowance for these types of travel expenses is reasonable is a question of fact. Consideration would need to be given to the reasonable costs that an employee would be expected to incur for actual trips compared to the amount of the allowance paid to the employee.

Reporting and withholding

Generally, cash payments of taxable benefits must be added to the employee's income each pay period and deductions (income tax, Canada Pension Plan contributions and Employment Insurance premiums) must be withheld in the normal manner. For tax purposes, if a non-cash benefit is of such a large value that withholding of income tax will cause undue hardship, you can spread the withholding over the balance of the year. Cash and non-cash taxable benefits must be reported on the employee's T4 slip. Further information with respect to withholding requirements on cash and non-cash payments of taxable benefits may be found in the Employers Guide, Chapter 1, under the heading Payroll Deductions.

It should be noted that if the payments to an employee for motor vehicle and other travel expenses were required to be included in his or her income, the employee may be able to deduct eligible employment expenses under paragraph 8(1)(f), (h) or (h.1) of the Act. Further information on employment expense deductions may be found in paragraphs 31-38 of IT-522R as well as in guide T4044, Employment Expenses available at http://www.cra-arc.gc.ca/E/pub/tg/t4044/README.html.

We trust the foregoing comments will be of assistance.

Yours truly,

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