8 February 1994 Internal T.I. 9400657 - EMPLOYMENT EXPENSES

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

February 8, 1994

Scarborough D.O. Personal and General
Business Audit Section Section
D. Zion
(613) 957-8953
Attention: John Lorimer
Section Manager

940065

Deductibility of Employment Expenses

This is in reply to your memorandum of January 5, 1994 concerning the above noted subject.

In your memorandum you have advised us that you are in the process of assessing or reassessing numerous 1990 to 1992 individual income tax returns prepared by XXXXXXXXXX You state that it is your intention to disallow most (if not all) of the claims for employee travel expenses and work space in home/equipment storage expenses and that XXXXXXXXXX is in disagreement with your position regarding the deductibility of these expenses. You have requested that we review your interpretation of the relevant provisions of the Income Tax Act (the "Act") prior to your completion of the assessment (reassessment) of the returns.

As the issues you raise are of a general nature and the tax consequences of a specific fact situation can only be determined by reviewing all the relevant facts, our comments are of necessity, general in nature rather than relating to a specific case. They are set out below in the order that the issues were raised in your memorandum.

Travel/Motor Vehicle Expenses

Whether or not paragraph 8(1)(g) of the Act would be applicable to any of XXXXXXXXXX clients would be a matter of fact. The Courts have strictly interpreted the statutory provisions of this paragraph. In Pepper v. M.N.R. (84 DTC 1613), the Court stated "...what the paragraph contemplates is corporations and individuals whose principal business is what is generally regarded as transportation companies or enterprises such as commercial trucking, railroading, shipping and airlines." Not only must the taxpayer be an employee of a person whose principal business would meet this requirement but also the employee would have had to regularly travel away from the municipality where the employer's establishment to which the employee reported for work was located and away from the metropolitan area where it was located. In addition, while away from the metropolitan area the employee must have had to make disbursements for meals and lodging. To be deductible, these amounts must not have been reimbursed to the employee and the employee must not be entitled to be reimbursed for them. A number of cases regarding whether or not an employee met the provisions of 8(1)(g) have been reviewed by the courts including Roy v. M.N.R. (81 DTC 238), Derrien v. M.N.R. (80 DTC 1751), Foster v. M.N.R. (83 DTC 620). The decisions in these cases are consistent with the Department's comments found in Information Circular IC-73-21R7. Although the information you have provided is limited, we agree that it is questionable whether or not any of these taxpayers would be eligible for a deduction under this paragraph.

Subsection 8(10) of the Act provides that expenses will only be deductible by an employee under paragraphs 8(1)(h) or (h.1) and subparagraphs 8(1)(i)(ii) or (iii) of the Act where the employee files with the return of income a prescribed form (T2200) signed by the employer to the effect that the employee met the requirements of the relevant provisions for the deductibility of such expenses. You have stated that, although some T2200's appear to contain false statements or omit information, you are in possession of certified copies of these forms pertaining to the employees in question. It is our opinion that, the fact that the employee is not required to use his or her own personal vehicle but chooses to do so, as is an option under the contract, does not automatically mean that the employee was not required under the contract of employment to pay the travelling expenses or motor vehicle expenses as envisioned by 8(1)(h)(ii) and 8(1)(h.1)(ii). Once the employee chooses to use his or her motor vehicle then by implication the employee will be required to pay the motor vehicle expenses. It is the further provisions in both subparagraphs which then may be applicable. In both paragraphs the phrase "amounts expended in the year for travelling in the course of his employment" follow subparagraphs (ii). As a consequence of this wording, it is our view that a taxpayer does not meet the requirement in subparagraphs 8(1)(h)(ii) or 8(1)(h.1)(ii) where the expenses are fully reimbursed.

It would follow that where an employee receives a full reimbursement in respect of amounts spent which are described in paragraphs 8(1)(h) and (h.1) the employee would not be entitled to deduct amounts under those provisions and the amount of such reimbursement would not be included in income. On the other hand, where an employee received only a partial reimbursement of amounts which are described in those provisions, the partial reimbursement should be included in income and the employee would be entitled to deduct the related amounts assuming they are otherwise eligible for deduction thereunder.

An employee would also not be eligible to claim expenses under paragraphs 8(1)(h) and/or (h.1) if in receipt of an allowance for travelling or motor vehicle expenses respectively, that was excluded from income by virtue of the provisions in 6(1)(b) of the Act.

Subsection 6(1)(b) provides that all amounts received by a taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose are to be included in income, except.....

(vii)reasonable allowances for travelling expenses (other than allowances for the use of a motor vehicle) received by an employee (other than an employee employed in connection with the selling of property or the negotiating of contracts for the employer) from the employer for travelling away from

(A) the municipality where the employer's establishment at which the employee ordinarily worked or to which he ordinarily made his reports was located, and
(B) the metropolitan area, if there is one, where that establishment was located,

in the performance of the duties of his office or employment,

(vii.1)reasonable allowances for the use of a motor vehicle received by an employee (other than an employee employed in connection with the selling of property or the negotiating of contracts for the employer) from the employer for travelling in the performance of the duties of the office or employment,....

and, for the purposes of subparagraphs (v),(vi) and (vii.1), an allowance received in the year by the taxpayer for the use of a motor vehicle in connection with or in the course of the taxpayer's office or employment shall be deemed not to be a reasonable allowance

(x)where the measurement of the use of the vehicle for the purpose of the allowance is not based solely on the number of kilometres for which the motor vehicle is used in connection with or in the course of the office or employment, or

(xi)where the taxpayer both receives an allowance in respect of that use and is reimbursed in whole or in part for expenses in respect of that use (except where the reimbursement is in respect of supplementary business insurance or parking, toll or ferry charges and the amount of the allowance was determined without reference to those reimbursed expenses).

A reimbursement is usually considered as a repayment of an expense actually incurred and an allowance implies an amount paid in respect of some possible expense without any obligation to account for any actual expense. Given the distinction between an allowance and a reimbursement, we are of the opinion that the phrase "reimbursed in whole or in part" found in subparagraph

6(1)(b)(xi) of the Act would not be interpreted to include flat rate allowances. Thus, where an employee receives a flat monthly (or daily) automobile allowance which is included in the employee's income by virtue of 6(1)(b) of the Act, and, in addition receives an allowance based solely on an amount per kilometre that the vehicle is used to earn employment income the payment of the flat rate allowance referred to above, will not be interpreted as a "reimbursement" for the purposes of subparagraph 6(1)(b)(xi) of the Income Tax Act (the "Act"), which would have had the effect of rendering the automobile allowance based on kilometres a taxable allowance as well.

Whether an allowance is reasonable would involve a finding of fact to be determined on the basis of all the circumstances of a particular case including the fact that more than one allowance is being paid to the employee in respect of the use of the same automobile. In Dallaire v. M.N.R. (93 DTC 193) the taxpayer, who was employed as a Bell Canada representative, sought to deduct the automobile expenses incurred by him in excess of the amount paid to him by his employer for the use of his automobile under 8(1)(h). The taxpayer was in receipt of a monthly flat allowance and a per KM allowance. The Court found that although the use of his automobile was an implied requirement of his contract of employment, Mr. Dallaire was unable to show that the per KM allowance he had received was not reasonable and therefore was not able to justify the deduction he had claimed under subparagraph 8(1)(h)(iii) of the Act. This was also at issue in The Queen v. Mina et al. (88 DTC 6245).

Meals

For the reasons outlined above we agree with your opinion that the employees were not transport employees and would not be eligible for the deductions under 8(1)(g) of the Act.

As a result of the interaction between paragraph 8(1)(h) and subsection 8(4) of the Act, an employee who is employed by a firm whose principal business is not the transportation of either passengers or goods cannot deduct any meal expense unless away from the home municipality for at least 12 hours. We are in agreement with the comments contained in your memorandum with respect to the deductibility of meals. However, we would like to mention that since Information Circular 73-21R7 provides comments on the application of paragraphs 8(1)(e), (g) or (h) of the Act, an employee making an otherwise allowable claim for meals under paragraph 8(1)(h) of the Act may use the simplified method described in the circular.

Work Space in the Home/Equipment Storage Expenses

Subsection 8(10) requires that a Form T2200 be prepared by an employer before an employee is entitled to claim expenses under 8(1)(i)(ii). There are a number of provisions that must be satisfied before an employee is entitled to deduct costs in connection with workspace in the home. One such requirement is that the employee be required by the contract of employment to provide such workspace. Ordinarily, this requirement necessitates that there be an express requirement within the terms of a written contract of employment. Nevertheless, it is the Department's general position that this requirement may also be considered to have been satisfied where it is tacitly understood by the employer and the employee that the workspace be provided by the employee.

Subsection 8(13) of the Act was added by Bill C-18 applicable to 1991 and subsequent taxation years and was introduced to restrict the deduction of expenses in respect of work space in the home which are otherwise allowable under either paragraph 8(1)(f) or (i) of the Act. Paragraph 8(13)(a) of the Act provides that, notwithstanding paragraphs 8(1)(f) and (i) of the Act, no amount is deductible in computing an individual's income from an office or employment in respect of work space in a self-contained domestic establishment in which he or she resides, except to the extent that the work space is either (i) the place where the individual principally performs the duties of the office or employment, or (ii) used exclusively during the period in respect of which the amount relates for the purpose of earning income from the office or employment and used on a regular and continuous basis for meeting customers or other persons in the ordinary course of performing the duties of the office or employment.

It would appear from the limited information provided to us that these employees do not meet the requirements of subparagraph 8(13) and, therefore, we are in agreement that these office-in-the-home expenses would not be deductible in computing their employment income.

We trust that our comments have been of assistance. We would be pleased to provide you with our technical assistance regarding any factual situations you may wish to submit should the need arise.

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch