22 August 2014 External T.I. 2014-0528201E5 - Northern residents travel 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: Whether a travel allowance provided for in a new employment contract would qualify as a benefit received in respect of travel expenses incurred by an employee for purposes of paragraph 110.7(1)(a) of the Act.

Position: Question of fact.

Reasons: See below.

XXXXXXXXXX
2014-052820
S. Trop

August 22, 2014

Dear XXXXXXXXXX:

Re: Northern residents travel allowance

We are writing in response to your letter dated April 15, 2014, concerning whether a travel allowance provided for in a new employment contract would qualify as a "benefit received or enjoyed, in the year by the taxpayer in respect of the taxpayer's employment…in respect of travel expenses incurred by the taxpayer" under paragraph 110.7(1)(a) of the Income Tax Act (the "Act").

In the situation you described, the terms and conditions pertaining to the compensation in the prior employment contract ("old contract") are terminated. No travel allowance was provided for in the old contract. A new negotiated employment contract ("new contract"), which will include a travel allowance, would be established on a prospective basis. The travel allowance in the new contract will be calculated as a fixed and identified amount per hour worked (i.e., XXXXXXXXXX% of the total hourly compensation amount). Under the new contract, the employee will be paid a separate wage amount which will be calculated as a fixed and identified amount per hour (i.e., XXXXXXXXXX% of the total hourly compensation amount). The total hourly compensation (i.e., the sum of the wage amount and the travel allowance) will be the same as under the old contract. Each employee will be required to include in his or her income for a particular taxation year the total hourly compensation received under his or her employment contract.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

Generally, the deduction provided in paragraph 110.7(1)(a) of the Act offsets the income inclusion in respect of certain benefits provided by an employer to an employee or the employee's family. The deduction is generally limited to travel benefits or expenses in respect of trips made for the purpose of obtaining necessary medical services not available locally or with respect to travel benefits or expenses in connection with not more than two other trips per year.

Paragraph 110.7(1)(a) of the Act refers, in part, to "an amount received, or the value of the benefit received or enjoyed, in the year by the taxpayer… in respect of travel expenses incurred by the taxpayer…" It is the view of the Canada Revenue Agency ("CRA") that there must be a connection between the actual travel expenses incurred by a taxpayer or a member of the taxpayer's household and the amounts paid by the taxpayer's employer to defray those costs, in order for the amounts to be "...in respect of travel expenses incurred by the taxpayer..." under paragraph 110.7(1)(a) of the Act. Generally, employee travel expenses are reimbursed by an employer after a trip. However, the CRA accepts that an employer can pay a reasonable travel allowance before a trip, such as a reasonable "per hour" or "annual premium", provided the details of such an allowance are specified in the employment contract.

Based on case law, tax consequences under the Act are dictated by a taxpayer's legal relationships unless there is a clear rule in the Act stating otherwise or a finding that the legal relationships are a sham. It is the CRA's view that a travel allowance provided for in a new contract would not be considered a re-characterization of an existing salary for the purposes of paragraph 110.7(1)(a) of the Act, where:

• the old contract has legally ended;
• the legal rights and obligations under the new contract designate (on a prospective basis) a portion of an employee's hourly compensation as a travel allowance;
• the employer and employee are dealing at arm's length;
• the travel allowance is accounted for separately in the payroll system and on the employee's pay stub; and
• the terms of the new contract are reflected in the collective agreement (where the employee is represented by a union).

It should be noted, however, that the CRA would not accept such a designation on a retroactive basis.  Moreover, inclusion of a travel allowance in an employee contract or in box 32 of an employee's T4 slip does not in and of itself mean that an employee is entitled to a deduction under paragraph 110.7(1)(a) of the Act.  Generally, an employee can only claim a deduction under paragraph 110.7(1)(a) of the Act if all the criteria for the deduction are met by that employee.  In particular, actual travel costs must have been incurred by the employee or a member of the employee's household.

We trust these comments will be of assistance to you.

Yours truly,

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