2 February 1998 External T.I. E9729945 - TAXABLE BENEFITS

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 payments made to employees for the rental of their tools should be included in income.

Position:

A rental payment or tool allowance or rental would be taxed under 6(1)(a) or 6(1)(b).

Reasons:

No specific exclusion found in 6(1)(b)(i) through to 6(1)(b)(ix), therefore any tool allowance received by the employees is taxable as employment income.

		5-972994
XXXXXXXXXX	Karen Power,C.A.

Attention: XXXXXXXXXX

February 2, 1998

Dear Sirs:

Re: Taxable Benefits

We are writing in response to your letter dated November 10, 1997, wherein you requested our opinion on whether your company's rental of your employees' tools would be considered a taxable benefit to the employees.

We understand that your employees would not be required to rent their tools to the company, but rather would only rent their tools to the company if they desired to do so.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature.

In our view, in a situation where an employer makes payments to an employee with respect to an employee's tools used in the employer's business, the payment represents a benefit received by virtue of the employer-employee relationship. Accordingly, the amounts are taxable in the hands of employees as employment income by virtue of paragraph 6(1)(a) of the Income Tax Act (the "Act").

Alternatively, all amounts received by a taxpayer as an allowance for personal or living expenses, or as an allowance for any other purpose, must be included in income from employment by virtue of paragraph 6(1)(b) of the Act. Generally, an hourly rental rate for tools would constitute an allowance. The Act makes certain exceptions in regards to allowances. These exceptions are provided for in subparagraphs 6(1)(b)(i) through to 6(1)(b)(ix); however, there is no specific exception for a tool allowance.

You have referred to the Department's position on tools which is set out in paragraph 23 of Interpretation Bulletin IT-470R "Employees Fringe Benefits". This paragraph indicates that where an employer makes payments to its employees to offset the cost of tools that the employees are required to have in order to perform their work, this payment shall be included as income from employment. You have suggested that because your employees will not be required to provide their own tools, then any payments made to the employees should not be considered taxable.

In our view, even though employees may not be required by contract to provide their tools, in any situation involving rental payments, the employees' tools that are rented would be those that "the employees are required to have in order to perform their work" and the rental payments would be taxable. An employer would be permitted to deduct the full amount of any rental payment or tool allowance paid to its employees.

We trust our comments will be of assistance to you.

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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