13 March 1997 External T.I. 9705495 - LIVING 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:

The tax implication of allowances and expenses paid by the Privy Council Office.

Position:

General information given on various provisions dealing with allowances and expenses.

Reasons:

No definitive answer given in view of incomplete information provided in respect of nine examples submitted.

		March 13, 1997

Mr. A. Gowling	Technical Review
		 and Remissions
	A/Director	   Section
	Verification Division      	Jacques E. Grisé
		957-2059
	Attention: B. Latourell
		970549

Living Allowances

This is in reply to your memorandum of February 24, 1997 concerning certain allowances paid under the direction of the Privy Council Office (PCO). You have asked for our opinion on the income tax implications relating to the nine examples sent to your Branch by the PCO.

Prior to dealing with the specific examples, we will comment on the legislative items you have raised that provide for exceptions to the general provision in paragraph 6(1)(b) of the Income Tax Act of including in income all amounts received as "an allowance for personal or living expenses or as an allowance for any other purpose."

Clause 6(1)(b)(i)(A)

The above clause provides for an exception with respect to travel, personal or living expense allowances "expressly fixed in an Act of Parliament." We confirm our interpretation that the clause is only applicable where a specific amount (e.g. $1,000 per month) is set as an allowance for travel, personal or living expenses in an Act of Parliament.

Subparagraph 6(6)(a)(i)

Subparagraph 6(6)(a)(i) of the Income Tax Act excludes from an employee's income, inter alia, a reasonable allowance received by the employee in respect of expenses incurred for board and lodging for a period at a special work site. The allowance is only excluded if other conditions are met such as maintaining as the employee's principal place of residence a self-contained domestic establishment at another location. The definition of a special work site is a location at which the duties performed by the employee were of a temporary nature.

We understand that the words "temporary nature" were used in the legislation to cover cases where an employee was sent somewhere for a fixed, short time. The expression would, for example, cover the case of a geologist sent to the Arctic for the summer season, a repairman who was sent away to help in a temporary emergency, and a construction worker where the job was not going to last long enough at an out-of-town work site to make the shifting of his family a practical proposition.

The Income Tax Act does not define the term "temporary nature." It is a question of fact as to whether or not the duties performed by an employee were of a temporary nature within the context of subsection 6(6) of the Income Tax Act. Guidelines were developed as to what the Department would accept as "temporary nature" for purposes of the special work site definition, in order to provide employers and employees with certainty in respect of allowances for board and lodging. One of the first guidelines was in Operations Branch Letter 76-72 dated September 20, 1976. The following text from that letter is of particular interest:

"Our policy will be that duties of up to one year will be considered temporary. We will allow an extension of one additional year to alleviate situations where the duties are just over one year. However, if the duties take more than two years to complete, then only in very special circumstances will they qualify as "temporary" under this paragraph."

The next major development in the guidelines was set out in paragraph 12 of Interpretation Bulletin IT-91R2, Employment at Special or Remote Work Sites, which stated:

"The Department has adopted a guideline that continuous employment at a location in excess of two years takes on the aspects of permanent employment and generally does not qualify as "temporary." Continuous employment for a period of less than two years will be considered "temporary".

IT-91R2 has since undergone a couple of revisions, but the "two year" guideline has been maintained. In this respect, please see paragraphs 5 and 6 of IT-91R4.

A review of this Directorate's correspondence on the question of "temporary nature" for the purpose of defining special work site has shown a resistance to going beyond the two year guideline. We encountered one situation in 1986 where we suggested that the District Office accept a three year period as temporary. In this particular situation, most employees in the project were hired for periods of less than two years but a few were hired for three years. We also noted that in 1979 the Tax Review Board accepted, on the facts of the particular case, a three year period as temporary for the purpose of defining a special work site. In this respect, please refer to James K. Middleton v. M.N.R., 79 DTC 597. The lack of court cases on the definition of special work site is an indication that the Department's two year guideline has been well accepted.

We hope the above information and paragraphs 5 and 6 of IT-91R4 will be helpful in determining if the duties performed by an employee, in a particular factual situation, were of a temporary nature.

We would like to provide some general statements and comments that may be of assistance in arriving at a conclusion on the tax implication relating to the nine situations presented by the PCO.

Subparagraph 6(6)(a)(ii)

It is doubtful that any of the situations presented contemplate the performing of the duties in a location that can be described as a remote work location. Accordingly, we have assumed that any allowance received will not be excluded from income by virtue of subparagraph 6(6)(a)(ii) of the Income Tax Act. Please refer to paragraphs 12 to 17 of IT-91R4 for a discussion on remote work locations.

Paragraph 6(6)(b)

Some of the situations presented refer to travel allowances or reimbursement of travelling costs. Paragraph 6(6)(b) of the Income Tax Act would only apply to exclude from income reasonable travel allowances or the value of free or subsidized transportation when there is a special work site or a remote work location. Please refer to paragraphs 10 and 18 of IT-91R4 for a discussion on transportation benefits or allowances that may be excluded from income by virtue of paragraph 6(6)(b) of the Income Tax Act.

Clause 6(1)(b)(i)(A)

None of the nine situations presented seem to deal with a travel, personal or living expense allowance expressly fixed (i.e., a specific amount) in an Act of Parliament. Some of the expenses are fixed by the Governor in Council while others seem to be established during the negotiation of the terms of employment. Accordingly, it seems that clause 6(1)(b)(i)(A) of the Income Tax Act will not be able to be used to exclude the allowances received from income.

In view of the limited information provided in the attachment to your memorandum, we are unable to reach a definitive conclusion on the income tax implications relating to the allowances paid in the nine situations presented by the PCO. However, we hope that the following comments on each of the situations will be helpful. The comments are in the order of the situations set out in the attachment to your memorandum.

Situation 1

It is difficult to determine if this situation relates to two positions or to one position that can be for a period of 3 or 5 years. If it is one position, will the incumbent receive the $950 per month if appointed for 5 years or the $1,300 per month if appointed for 3 years? If two positions are involved, which amount will be received by each of the incumbents?

Both of the clauses refer to "the expenses." What are the expenses covered by the amounts of $950 and $1,300 per month? The clauses use the term "an amount not exceeding." Are we dealing with reimbursements of specific expenses or allowances in this situation?

Since the monthly amounts are not being paid for the term of appointment, are they being paid as part of a relocation program? In this respect, please refer to the information in situation 9 below.

Situation 2

This situation contemplates two monthly payments. The first amount is "$1,300 per month for specified period." What is the "specified period" and what expenses are intended to be covered by the $1,300 per month?

The amount of $1,500 per month is identified as "monthly living expenses" and seems to be for the duration of the 5 year appointment. It would be difficult to imagine how this allowance would not be taxable. However, all the facts surrounding the particular case would need to be examined to arrive at a definite conclusion.

Situation 3

The amount of $1,500 per month is identified as a "monthly living allowance" and seems to be for the duration of the 5 year appointment. Again, it would be difficult to imagine how this allowance would not be taxable. All the facts surrounding the particular case would need to be examined to arrive at a definite conclusion.

The PCO indicates in parentheses: "Letter confirming the allowance was in the net amount of $1,500, in favour of the incumbent." What does this statement mean?

Situation 4

This situation is interesting in that the clauses dealing with the $1,300 per month living allowance and the reimbursement of air fares to travel home contemplate that the amounts paid are subject to tax. It is doubtful that the allowance and travel reimbursements would not be taxable. Since the payment of the tax by an employer on a taxable benefit provided to an employee is itself a taxable benefit to the employee, it may be worthwhile to establish how this is handled. We note that situation 6 also contemplates that the monthly living allowance is a taxable allowance.

The cost of shipment of an employee's personal effects at the conclusion of the incumbent's employment is a personal expense. The reimbursement of an employee's personal expense is a taxable benefit pursuant to paragraph 6(1)(a) of the Income Tax Act. Paragraph 36 of IT-470R, Employee Fringe Benefits, provides the only exception where the employer pays the expenses of moving out of a remote place at the termination of employment. The situation contemplated does not seem to be dealing with employment in a remote place.

Situation 5

This situation contemplates a three year appointment. For purposes of a special work site analysis, it would be worthwhile to review the historical appointments to this position in order to determine if it is common to renew an appointment. Does the current contract of employment contemplate a possible renewal?

Situation 6

See the comments in the first paragraph under situation 4 above.

Situation 7

There is very little information given in this situation. It would be helpful to obtain a copy of the TB Relocation Directive relating to temporary dual residence assistance as well as the specific amounts to be paid. It has been our understanding that the temporary dual residence assistance program is for a short period of time, such as three months, during the initial stages of relocation.

Please refer to situation 9 below for additional comments relating to relocation expenses.

Situation 8

The facts of this particular situation would need to be clarified. Are the amounts paid for travel and living expenses in the form or reimbursements or allowances? What place is considered the Commissioner's "ordinary place of residence"?

It is likely that the amounts paid for travel and living expenses are taxable but full details would be required to correctly assess the tax implications.

Situation 9

Generally, the payment of an employee's removal expenses, because of the employee having accepted employment at a place other than where the former home was located, by an employer on an accountable or reimbursement basis is not considered to confer a benefit on the employee. This will also apply where the employer pays the expenses of moving an employee out of a remote place at the termination of employment in that remote place. In this respect, please refer to paragraphs 35 and 36 of Interpretation Bulletin IT-470R. However, as discussed in paragraph 2 of IT-470R, there may well be a point beyond which a payment in the guise of a relocation expense is, in fact, a form of extra remuneration.

The specifics with respect to the assistance for the sale of a home would need to be examined in order to determine if the amount can be classified as a non-taxable relocation payment.

The Department is accepting a non-accountable allowance for incidental relocation or moving expenses of up to $650 to be a reimbursement of expenses that employees incurred because of a move. In this respect, please refer to the Employers' Guide to Payroll Deductions - Taxable Benefits. A non-accountable allowance for incidental moving expenses in excess of $650 is required to be included in income. The specifics of the agreement should be examined, since the amount equivalent to four weeks salary may be a cap for reimbursing actual relocation expenses and not an allowance as suggested.

It is not unusual for employers to pay for the cost of an employee's temporary accommodation at a new work location during the initial stages of relocation. Typically, such expenses are paid because there is some specific reasons for delaying the move to the new location, such as illness of a dependant and the completion of a school term. Generally, such payments are accepted as non-taxable relocation expenses. Accordingly, it will be necessary to examine the facts of a particular case to ensure that the living expenses paid relate to the relocation and are not in the form of a taxable benefit.

Bryan Dath
Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch