6 March 2013 External T.I. 2012-0468051E5 - Municipal Officer's tax free 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.

Principal Issues: Can a municipal officer choose to include in income the full amount of the expense allowance received from the municipality, ignoring subsection 81(3), and deduct the actual expenses incurred?

Position: Question of fact

Reasons: Subsection 81(3) is not discretionary, since the wording states "shall not be included". Deductions for officers and employees are limited to those specified in section 8 of the Income Tax Act.

XXXXXXXXXX
2012-046805
Bonnie Ruttan-Morillo

March 6, 2013

Dear XXXXXXXXXX,

Re: Municipal Officers' Allowance

This is in response to your query regarding the tax treatment of the tax-free allowance received by council members. You ask if it is possible for the council members to include the allowance, which would normally be excluded under subsection 81(3) of the Income Tax Act (the Act), in computing their income from an office and deduct their expenses where the council member determines that the allowance is not sufficient to cover their expenses.

Our Comments

The wording in subsection 81(3) of the Act specifically states that an allowance shall not be included in an individual's income unless it exceeds one half of their salary. In our view, the wording in that subsection is not discretionary, in that it does not provide the option of including or excluding an allowance received by an elected official for expenses incident to the discharge of his/her duties. Therefore, if a council member receives such an allowance from the municipality, subsection 81(3) of the Act applies to exclude that allowance, subject to the limitations explained in paragraphs 6 and 7 of Interpretation Bulletin IT-292, Taxation of Elected Officers of Incorporated Municipalities, School Boards, Municipal Commissions and Similar Bodies.

Under section 8 of the Act, there are a limited number of deductions available in computing income from an office or employment. Generally, where an employee or officer incurs expenses for travelling in the performance of the duties of employment ("employment travel expenses") for which no allowance or reimbursement is received, he or she may be able to deduct the expense under section 8 of the Act. However, where an employee or officer can demonstrate that an allowance received for employment travel expenses is not sufficient to cover the actual expenses incurred (i.e. it is not reasonable), the CRA will generally allow the deduction of the employment travel expenses under section 8 of the Act if the allowance is voluntarily included in income and all other requirements under section 8 are met. It should be noted that travel between home and the municipal office is considered personal travel and no deduction would be allowed even where no allowance was received.

The municipality may complete Form T2200, Declaration of Conditions of Employment, in respect of employment travel expenses that the municipality required the council member to incur and for which no reasonable allowance or reimbursement was provided. As noted in Technical Interpretation 2005-0131691E5, a council member is not entitled to claim a deduction for expenses incident to the discharge of his or her duties since he or she is in receipt of a tax-free allowance for those expenses.

We trust these comments are of assistance to you.

Yours truly,

Nerill Thomas-Wilkinson, CPA, CA
Manager
for Director
Business and Employment Division
Income Tax Rulings Directorate