6 March 2012 Ministerial Correspondence 2012-0433441M4 - Tax exempt allowance for municipal officers

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: Whether municipal officers who receive a portion of their remuneration as a tax exempt allowance can be reimbursed by the municipality for expenses incurred?

Position: The CRA distinguishes between an allowance and a reimbursement of an expense in determining whether an amount is taxable or not. It is the municipality that determines whether or not to reimburse an officer for expenses incurred. If an amount is a reimbursement of a personal expenditure, it would be included in income. If the expense was incurred in the performance of the officer's employment duties, the reimbursement is not taxable

Reasons: The law

March 6, 2012

XXXXXXXXXX

Dear XXXXXXXXXX :

Thank you for your correspondence of January 13, 2012, concerning the taxation of an elected municipal officer's reimbursements and allowances.

The confidentiality provisions of the Income Tax Act prohibit me from discussing a taxpayer's tax affairs with you without the taxpayer's written authorization. I can, however, offer the following general comments about reimbursements and allowances paid to elected municipal officers.

For the purpose of taxing income from an office, including a municipal office, or employment, the Canada Revenue Agency (CRA) treats differently a reimbursement of an employee's expense and an allowance paid to an employee. The CRA considers a reimbursement to be a payment from an employer to an employee to repay a specific amount the employee spent on the employer's business. A reimbursement is generally not income for the employee receiving it. An allowance is a predetermined amount that is set for a specific purpose. The recipient can use an allowance at his or her discretion and he or she does not need to account for spending the funds on an actual expense or cost.

Paragraph 6(1)(b) of the Act indicates that any allowance an employee receives from his or her employer is taxable as employment income. Subsection 81(3) of the Act allows an elected municipal officer to exclude from income the allowance he or she receives for expenses to carry out his or her employment duties if the amount does not exceed 50% of his or her salary or other remuneration from that office or employment. Please note that this provision relates to allowances and not to reimbursements. The subsection exempts allowances that would otherwise be taxable, including an allowance for general expenses, such as office supplies or equipment.

The municipality determines whether it will reimburse a municipal officer's expense or whether the allowance the officer receives will cover the expense. Provinces have exclusive jurisdiction over municipalities in Canada. The Act determines only whether a reimbursement or allowance received by a municipal officer is taxable.

If an employer reimburses an employee for personal expenses, the employee must include the reimbursement in his or her income. This requirement applies to any employee of any business or organization, including an elected municipal officer.

In your letter of December 9, 2011, addressed to the Income Tax Rulings Directorate, you state that you informed the CRA's Informant Leads Program about this matter. I assure you the CRA takes all leads very seriously and reviews the information to ensure compliance with the provisions of the acts it administers. However, the CRA cannot give you any information about the results of a review due to the confidentiality provisions of the Act.

The CRA is responsible for administering the tax legislation enacted by Parliament. Your comments regarding the fairness of the exemption under subsection 81(3) for elected municipal officers relate to tax policy, which is the responsibility of the Department of Finance Canada. If you still have concerns, you can contact the Tax Policy Branch of Finance Canada by writing to 140 O'Connor Street, Ottawa ON K1A 0G5.

I trust that my comments are helpful.

Yours sincerely,

Gail Shea, P.C., M.P.

Bonnie Ruttan-Morillo
905-721-5094
File # 2012-043344 or 2011-043096