20 March 2012 External T.I. 2012-0433121E5 - Municipal Officers' expense 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: What is the proper tax treatment relating to payments made to an elected municipal officer from a Discretionary Fund?

Position: Question of fact.

Reasons: Proper treatment of a payment depends on whether a receipt is required (i.e accountable vs non-accountable) and whether the expense is considered primarily for the benefit of the officer or the employer (i.e. personal vs municipal business).

XXXXXXXXXX
								2012-043312
								W. Doiron

March 20, 2012

Dear XXXXXXXXXX :

Re: Municipal Officer's expense allowance

This letter is in response to your email concerning the proper tax treatment of certain payments made to an elected officer of an incorporated municipality ("Officer") from a Discretionary Fund. The Discretionary fund payments in question are ad hoc payments made either:

• directly to the Officer for reimbursement of expenses (e.g. hospitality costs incurred by the Officer at a conference, lunch, dinner); or
• directly to a third party to the benefit of an Officer (e.g. attending a golf event, lunch, dinner).

We are prepared to offer the following general comments which may be of assistance.

Generally, in accordance with paragraph 6(1)(a) of the Income Tax Act (the "ITA") the value of benefits of any kind whatever received or enjoyed by a taxpayer in the year in respect of, in the course of, or by virtue of an office or employment, subject to certain exceptions, is subject to tax. The Canada Revenue Agency ("CRA") accepts that where an amount is paid by an employer in respect of an item that is primarily for the benefit of the employer then it is generally not considered to be a taxable benefit to an employee or officer.

For purposes of taxing income from an office or employment, it is important to differentiate between a "reimbursement" of an employee's expense and an "allowance" paid to an employee. In this context, a reimbursement is a payment from an employer to an employee to repay the employee for a specific amount already actually spent by the employee on the employer's business. An accountable advance is an amount given by an employer to an employee for expenses to be incurred by the employee and to be accounted for by the production of receipts and the return of any amount not so spent. A reimbursement or an accountable advance is generally not income in the hands of the employee receiving it, unless it represents the payment of the employee's personal expenses.

By contrast, for purposes of this discussion, an allowance is:

• an arbitrary amount in that it is a predetermined sum set without specific reference to any actual expense or cost;
• usually for a specific purpose; and
• usable at the discretion of the recipient in that the recipient need not provide receipts for the expenditure of the funds.

Paragraph 6(1)(b) of the ITA provides that an allowance received by an employee from his or her employer is taxable as employment income. Paragraph 6(1)(b) goes on to list various exceptions to this general rule. For Officers, subsection 81(3) of the ITA provides a further exception to the general rule that allowances paid in connection with an office or employment are taxable. The CRA's general views regarding municipal officers' allowances are contained in Interpretation Bulletin IT-292, Taxation of Elected Officers of Incorporated Municipalities, School Boards, Municipal Commissions and Similar Bodies ("IT-292").

The effect of subsection 81(3) is to permit Officers to exclude from their income for a year an amount received as an allowance for expenses connected with carrying out employment duties, provided that the amount does not exceed 50% of their salary or other remuneration. The types of allowances that are exempted by this provision are those that are otherwise considered to be taxable.

As noted in IT-292, where the Municipal Act of a province deems that a proportion of the total amount paid (as arrived at in paragraph 3 of IT-292) to an Officer is an allowance for expenses, it is the CRA's policy ("Policy") that the proportion so deemed to be an expense allowance (up to one-third of the total paid) will be accepted as an expense allowance notwithstanding that local bylaws may specifically allocate portions of the total to salary, indemnity, allowance or other remuneration.

Where there is no deeming provision in the Municipal Act of a province, the CRA will consider one-third of the total arrived at in paragraph 3 of IT-292 to be an expense allowance and two-thirds to be salary or other remuneration, except that where the expense allowance actually paid is less than one-third of the total received this actual amount will be used, or where no expense allowance is actually paid none will be allowed.

With respect to a payment made from the Discretionary Fund in question directly to an Officer, the proper treatment of each payment is a question of fact. Based on the information provided, each payment should be treated as follows:

• A reimbursement of specific expenses incidental to the duties as an Officer in which supporting receipts are required would not be considered an expense allowance and as a result would not be taxable to the Officer;
• A reimbursement of specific expenses incidental to the duties as an Officer which does not require supporting receipts but meets the conditions of subparagraph 6(1)(b)(vii) as follows:
  • the allowance is a reasonable amount,
  • the allowance is received for travelling away from the municipality and the metropolitan area where the employer's establishment, at which the employee ordinarily worked or to which the employee made reports, was located, and
  • the travelling is done in the performance of the duties of the office or employment would not be taxable to the Officer. If the conditions of subparagraph 6(1)(b)(vii) are not met then the reimbursement would be considered an expense allowance subject to the Policy noted above; or
• A reimbursement that is not incidental to the duties as an Officer would be fully taxable to the Officer.

With respect to a payment made from the Discretionary Fund in question directly to a third party, the proper treatment of each payment is a question of fact. Accordingly, each payment should be treated as follows:

• Where the payment is primarily for the benefit of the employer then the amount would not be taxable to the Officer; or
• Where the payment is primarily for the benefit of the Officer then the amount would be fully taxable to the Officer.

It is the employer's responsibility to determine whether the primary beneficiary of the economic advantage is the employer or the employee.

We trust these comments will be of some assistance.

Yours truly,

Lita Krantz
Assistant Director
International Division/ Division des opérations internationales
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch