31 May 2010 External T.I. 2010-0361001E5 - Employee allowances for travel and home office

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: The correct treatment of allowances paid to employees to partially cover costs of travel and home offices as required by the employment contract.

Position: Allowances must be included in employment income. The employees may be entitled to deduct some of the costs incurred for travel and home offices.

Reasons: The provisions of paragraph 6(1)(b). Employment expenses may be deducted only as allowed by section 8.

2010-036100
XXXXXXXXXX Rita Ferguson
519-645-5261
May 31, 2010

Dear XXXXXXXXXX :

Re: Allowances

This is in response to your letter of March 19, 2010 inquiring about travel and home office allowances paid to employees of your organization. We understand that a lump sum monthly allowance is paid to employees to partially cover the combined costs of transportation (including the use of a motor vehicle), meals and refreshments, and other similar expenses of employment-related travel within the municipal area of XXXXXXXXXX . A second monthly allowance is paid to partially cover the costs of operating a home office. Employees are required under their employment contract to work from home and in the community, and they will not be reimbursed for any of the costs incurred other than through these monthly flat rate allowances.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

Our Comments

The tax treatment of allowances paid by an employer to an employee is discussed in Guide T4103, "Employers' Guide - Taxable Benefits and Allowances." Additionally, a recent change in the CRA's administrative treatment of travel allowances (other than motor vehicle allowances) is discussed in Income Tax Technical News #40. Generally an allowance is subject to tax unless it falls within the exceptions listed in subparagraphs 6(1)(b)(i) to (ix) or subsection 81(3.1) of the Income Tax Act (the "Act"), or unless it is excluded from income under subsection 6(6) of the Act in respect of a special worksite or remote work location.

The Act permits an employer to pay a motor vehicle allowance and/or a travel allowance on a non-taxable basis, but there are certain criteria that must be met to qualify for this treatment. For example, an allowance in respect of the use of a motor vehicle must be calculated only by reference to the number of kilometres driven in connection with employment. The travel allowance described in your inquiry contemplates such an expense, but does not satisfy this requirement. We are unable to conclude that the two allowances described in your inquiry qualify for non-taxable treatment. They would therefore be required to be included in employment income of the recipients and reported on their T4 slips.

However, where an allowance is included in income, employees may be entitled to deduct some of the actual expenses they have incurred in the performance of their employment duties. In this respect, Guide T4044, "Employment Expenses" provides general information about both travel and home office expenses. More detailed information regarding the deductibility of travel costs and motor vehicle expenses is available in Interpretation Bulletin IT-522R, "Vehicle, Travel and Sales Expenses of Employees". We note that deductions related to meal expenses are subject to additional limitations which are discussed in Interpretation Bulletin IT-518R, "Food, Beverages and Entertainment Expenses." Finally, more information regarding home office expenses is available in Interpretation Bulletin IT-352R2, "Employee's Expenses, Including Work Space in Home Expenses".

We would also note that although the Act is somewhat restrictive with respect to the deduction of specific employment expenses, subsection 118(10) of the Act provides a non-refundable tax credit called the Canada Employment Credit. First effective in 2006, this credit recognizes that employees often incur various work related expenses. There is no requirement that a specific employment expense be proven. Rather, the credit is simply calculated as the lesser of an indexed amount ($1,050 for 2010) or the total of all income from office or employment for the year (not including any deductions under section 8 of the Act) multiplied by the appropriate percentage for the year. For 2010, this percentage is 15%.

We trust that these comments have been of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch