23 September 1996 Income Tax Severed Letter 9616357 - Meals and 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.

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.

PRINCIPAL ISSUES:

Whether allowances in general and subparagraph 6(6)(a)(i) allowances in particular qualify for exemption from subsection 67.1(1) under the exemption provided by paragraph 67.1(2)(e).

POSITION:

Allowances for board and lodgings that are exempted from tax in the hands of an employee working at a special work site are not exempted by 67.1(2)(e).

REASONS:

The wording does not fit the exemption. Allowances paid employees in respect of their cost for board and lodgings cannot be interpreted to be the same as the cost of "food beverages and entertainment". In the recent Federal Court of Appeal decision Attorney General of Canada v. MacDonald [ [1994] 2 C.T.C. 48] (94 DTC 6262) the issue of allowance versus reimbursement was discussed in detail along with the leading precedential jurisprudence. It is now a well accepted principle that an allowance for tax purposes is (i) "an arbitrary amount in that it is a predetermined sum set without specific reference to any actual expense or cost"; (ii) "will usually be for a specific purpose"; and (iii) "in the complete discretion of the recipient in that the recipient need not account for the expenditure of the funds towards an actual expense."

September 23, 1996

Edmonton Tax Services Head Office Attn: E.R. Sherman Rulings Directorate Assistant Director AuditA.M. Brake (613) 957-8953 961635

Meal allowances and subsection 67.1(2)

This is further to our memorandum (file #943168) of February 16, 1995, in reply to your referral of December 6, 1994 wherein you requested our views on the exemptions from subsection 67.1(1) as provided by subsection 67.1(2), specifically paragraph (e) thereof as it relates to non- accountable allowances paid to employees for food and/or meals under certain circumstances to employees who are not in travel status. Reference was made to article 9128 in "Canadian Tax Reporter" and article 1096 in "Window on Canadian Tax" quoting a January 18, 1991 technical interpretation given by this division.

We ask you to ignore the last paragraph of our earlier memorandum, in particular the italicized portion at the end of the paragraph which reads as follows:

The exemption in paragraph 67.1(2)(e) is generally only available where the employer either provides the food, beverage or entertainment directly or makes the arrangements to provide these things. Allowances and reimbursements paid to employees who purchase food, beverages or entertainment are not eligible for this exemption from the 80% (now 50%) limitation, unless extenuating circumstances exist (such as a lack of catering facilities at the location) that prevent the employer from providing the services or making the arrangements to provide them. Accordingly, in our view, under extenuating circumstances, non-accountable allowances may qualify for the paragraph 67.1(2)(e) exception.

The comments contained herein supersede our earlier comments and in particular special attention should be given to the wording contained in paragraph 67.1(2)(e) describing those who are generally entitled to partake in the consumption as, "all individuals employed by the person at a particular place of business of the person...".

Underlying any discussion on the exceptions from the restriction provided in subsection 67.1(1), should be the understanding that subsection 67.1(1) is intended to restrict all legitimate business expenditures for food, beverage or entertainment to recognize the personal element of the expenditures. Subsection 67.1(2) then provides exceptions from the restriction.

As you know, the Department's stated views on the issue have been reviewed and have recently been reflected in paragraph 13 of Interpretation Bulletin IT-518R (issued April 16, 1996) as follows:

"The exemption in paragraph 67.1(2)(e) is only available where the employer either provides the food, beverages or entertainment directly or makes the arrangements to provide these things. Allowances and reimbursements paid to employees who purchase food, beverages or entertainment are not eligible for this exemption from the 50% limitation."

In the recent Federal Court of Appeal decision Attorney General of Canada v. MacDonald [ [1994] 2 C.T.C. 48] (94 DTC 6262) the issue of allowance versus reimbursement was discussed in detail along with the leading precedential jurisprudence. It is now a well accepted principle that an allowance for tax purposes is (i) "an arbitrary amount in that it is a predetermined sum set without specific reference to any actual expense or cost"; (ii) "will usually be for a specific purpose"; and (iii) "in the discretion of the recipient in that the recipient need not account for the expenditure of the funds towards an actual expense." On the other hand, a reimbursement is considered to be a repayment made to a person with respect to an expense or loss incurred. Although the allowance must be a predetermined sum set without specific reference to an actual cost or expense, the Court commented in its decision that this did not preclude the amount from being determined with reference to a projected or average expense or cost.

Paragraph 6(1)(a) requires to be brought into income an amount relating to a benefit in respect of board or lodging and any other benefits of any kind whatever except benefits described in subparagraphs 6(1)(a)(i) through (v). Paragraph 6(1)(b) requires all allowances to be brought into income in the year received for personal living expenses or as an allowance for any purpose to the extent that they are not described within the exceptions set out in subparagraphs (i) to (xi) thereof. Allowances received as meal or food allowances that are not described in the exceptions are subject to tax unless specifically exempted by some other provision of the Act. Hence, it can be said that, generally speaking, the value of free meals constitute a taxable benefit under paragraph 6(1)(a) and that non-accountable allowances are required to be brought into income by virtue of paragraph 6(1)(b), subject, of course, to the exceptions provided by these respective provisions (paragraphs (a) and (b)), unless they are exempted by virtue of paragraph 6(6)(a) which provides exemption for allowances received at a special work site or remote area. Subparagraph 6(6)(a)(i) applies to non-accountable allowances paid to employees at a special work site whereas subparagraph 6(6)(a)(ii) relates to non-accountable allowances at a remote location. The amounts exempted by paragraph 6(6)(a) from tax in the hands of the employee are, as such, amounts that are not required to be brought into income by virtue of subparagraphs 6(6)(a)(i) and (ii).

Paragraph 67.1(2)(d), provides an exemption from subsection 67.1(1) where the amount

"(d) is required to be included in computing the income of an employee of the person or would be so required but for subparagraph 6(6)(a)(ii);"

The words "where the amount is required to be included in computing the income of an employee" encompass taxable benefits such as free meals and non-accountable allowances described in paragraphs 6(1)(a) and (b) that have not been excepted within these paragraphs or would have been required if not specifically exempted by virtue of paragraph 6(6)(a). The paragraph 67.1 (2)(d) exemption specifically describes the remote area amounts that "would be so required but for subparagraph 6(6)(a)(ii)". It does not exempt special work site amounts which would be required to be brought into income but for subparagraph 6(6)(a)(i). If it had been the intention of the legislation to exempt special work site amounts in the same manner as remote area amounts, surely it would have been so done by referring to amounts that would be so required but for paragraph 6(6)(a). In our view, the fact that the reasonable allowances exempted by subparagraph 6(6)(a)(ii) have been specifically mentioned and that the special work site allowances described in subparagraph 6(6)(a)(i) have not, by their very absence from paragraph 67.1(2)(d), one should conclude that there was no intention to exempt a special work site allowance under another provision. In addition, paragraph 67.1(2)(e), in part, reads:

"... where the amount

(e) is incurred by the person for food, beverages, or entertainment generally available to all individuals employed by the person at a particular place of business of the person and consumed or enjoyed by such individuals...".

Given the definition of allowance, set out above, as being a predetermined, non-accountable and all inclusive amount, one should not misconstrue that the wording of paragraph 67.1(2)(e) was intended to include an allowance, referred to in subparagraph 6(6)(a)(i), given to an employee by the employer in respect of expenses incurred by that employee for board and lodging, when it is clear that food and beverage (likely of a different vintage) would comprise only one factor of the basis upon which the total amount of the allowance was predetermined and when the amount must specifically be incurred by the employer for food, beverages or entertainment.

In the recent case of Corporation Notre-Dame de Bon-Secours v. Communauté urbaine de Québec and City of Québec, (1994) 3 S.C.R. 3, the Supreme Court of Canada analyzed the rules for interpreting tax legislation. On page 17 thereof, Gonthier, J. made the following comments with respect to the ordinary rules of statutory interpretation:

"... there is no longer any doubt that the interpretation of tax legislation should be subject to the ordinary rules of construction. At page 87 of his text The Construction of Statutes (2nd edition 1983), Driedger fittingly summarizes the basic principles: "... the words of an Act are to be read in their entire context in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of parliament." The first consideration should therefore be to determine the purpose of the legislation, whether as a whole or as expressed in a particular provision. The following passage from Vivien Morgan's article "Stubart: What the Courts Did Next" (1987), 35 Can. Tax J. 155 at pp. 169-70, adequately summarizes my conclusion:

There has been one distinct change (after Stubart), however, in the resolution of ambiguities. In the past, resort was often made to the maxims that an ambiguity in a taxing provision is resolved in the taxpayer's favour and that an ambiguity in an exempting provision is resolved in the Crown's favour. Now an ambiguity is usually resolved openly by reference to legislative intent. (Emphasis added.)"

In considering the exemption provided by paragraph 67.1(2)(e), the wording contained therein should not be read in isolation to other paragraphs of that subsection. The words should be interpreted in the context from which they are drawn. In our view, it is a weak argument that paragraph 67.1(2)(e) provides an exemption for the special work site amounts described in subparagraph 6(6)(a)(i), when, in our view, as described above, it is clear that if these amounts were to be exempted, the exemption would have been provided in paragraph 67.1(2)(d).

In our view, paragraph 67.1(2)(e) has very limited application. The technical notes to the paragraph indicate that it was enacted to provide exemption for costs relating to a Christmas party. While not restricted to a Christmas party, it could provide an exception for costs relating to another function that is "... generally available to all individuals employed by the person at a particular place of business of the person...". In this regard you might note that the present wording, as amended, applicable to taxation years ending after July 13, 1990, is distinctly different from the previous wording which read as follows:

"(e) is incurred by the person for food, beverages or entertainment generally available to all employees of the person at a particular location".

The change was with respect to the description of those to whom the food must be generally available. In the former wording, the food must have been available to all employees "at a particular location". The "particular location" being any location where employees where performing duties for their employer at a particular time. This could be interpreted to mean that if an employer had employees working at several locations on any particular day, a party could be held for employees of each location and as long as all employees at each location were eligible to participate at their respective party, the "available to" requirement would have been met. The requirement in the amended version is that the attendees must generally be "all individuals employed by the person at a particular place of business of the person". In other words, the emphasis on who must be eligible to participate has shifted to "all individuals considered to be employed at a particular place of business of the employer." This brings up the question of the meaning of employed within the context of "employed by the person at a particular place of business of the person". In this context, employed, in our view, should be interpreted as being more of a reference to the employee's normal place of employment and not a temporary work location albeit a place of business of the employer. In this regard, it can be said that an employee may perform certain functions at different locations of the employer and at locations of customers or clients but an employee would be considered to be employed at the employer's place of business where work is normally reported for, direction is received, pay cheques are picked up, etc. An individual would be considered to be employed at one particular place of business rather than being employed at every different location that each performs a function for their employer. As an example, we would suggest that a bus driver would be considered to be employed at the home terminal or office of the bus company rather than being employed on the bus, itself, and for purposes of paragraph 67.1(2)(e), it would be expected, generally, that all bus drivers reporting to a particular home terminal would be eligible to attend. There would not be a separate Christmas party for the individual drivers of each bus.

In summary the paragraph 67.1(2)(e) exemption was intended to have limited application and should not be expanded to include allowances under any circumstance.

We apologize for any inconvenience this matter may have caused.

R. Albert for Director Business and Publications Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch