20 May 2010 External T.I. 2009-0340221E5 - Payment of employee food expenses

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:
1. Can a personal services business deduct the payment of an incorporated employee's personal food expenses?
2. If so, will the deduction available to the personal services business be restricted to 50% of the amount paid or payable pursuant to subsection 67.1(1) of the Act?

Position:
1. Question of fact, but in this case, likely yes (subject to the expenses being reasonable for purposes of section 67 and not considered to be received by the incorporated employee in his capacity as a shareholder of the personal services business).
2. Question of fact, but in this case, likely no.

Reasons:
1. Pursuant to subparagraph 18(1)(p)(ii) of the Act.
2. Pursuant to the application of paragraph 67.1(2)(d) or (e) of the Act.

								2009-034022
XXXXXXXXXX 							Renee Sigouin
								(613) 957-2128
May 20, 2010

Dear XXXXXXXXXX :

Re: Payment of Employee Food Expenses

We are writing in response to your letter of September 10, 2009 wherein you asked whether a company would be entitled to deduct the cost of its employee's personal grocery expenses that were charged to the company's credit card and if so, whether the deduction would be restricted by subsection 67.1(1) of the Income Tax Act (the "Act") to 50% of the amount actually paid or payable by the company.

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.

Background

We understand that your client (the "Taxpayer") is a "personal services business" (a "PSB") as this term is defined in subsection 125(7) of the Act. The Taxpayer provides services to XXXXXXXXXX . The Taxpayer's services are performed exclusively by its incorporated employee (the "Individual"). The Individual leaves his permanent residence in XXXXXXXXXX , where his family resides, for 2 to 3 weeks per month to perform services on behalf of the Taxpayer XXXXXXXXXX . During these periods, the Taxpayer provides the Individual with a trailer at XXXXXXXXXX that is complete with electricity, water and cooking facilities, as well as a credit card to purchase his personal groceries (the "Disbursements").

Our Comments

A corporation that is a PSB under the Act is restricted in the types of expenses it may deduct in a taxation year to those specifically permitted by paragraph 18(1)(p) of the Act. The provision restricts the deduction of outlays or expenses made or incurred by the PSB for the purpose of gaining or producing income to (inter alia):

i) salary, wages or other remuneration paid to an incorporated employee (i.e., in this case, to the Individual); and

ii) the cost to the corporation of providing any benefit or allowance to an incorporated employee;

In order for any of the abovementioned expenses to be deducted under paragraph 18(1)(p) of the Act, it must also be established that the expense would have been deductible to the corporation if it were not carrying on a PSB.

The Disbursements paid by the Taxpayer appear to fall within subparagraph 18(1)(p)(ii) of the Act, as they represent a benefit provided by a PSB to an incorporated employee. The Disbursements may therefore be deducted by the Taxpayer if it can also be established that they would have been deductible to the Taxpayer if it were not carrying on a PSB. In general terms, an expense may be deducted by a corporation to the extent that it is made for the purpose of earning income (i.e., paragraph 18(1)(a) of the Act), is not on account of capital (i.e., paragraph 18(1)(b) of the Act), is reasonable in the circumstances (i.e., section 67 of the Act) and is not otherwise prohibited or restricted (e.g., section 67.1 of the Act).

Subsection 67.1(1) of the Act provides that an otherwise deductible amount paid or payable in respect of the human consumption of food or beverages or the enjoyment of entertainment is restricted to 50% of the lesser of the amount actually paid or payable and an amount that is reasonable in the circumstances. This rule is discussed in more detail in IT-518R: Food, Beverages and Entertainment Expenses ("IT-518R"). Subsection 67.1(2) lists a number of exceptions to the application of subsection 67.1(1) of the Act. Based on the information that you have provided, it appears that of relevance to your question are the exceptions in paragraphs 67.1(d) and (e) of the Act. These exceptions apply where an amount:

i) is required to be included in computing any taxpayer's income because of the application of section 6 of the Act in respect of food or beverages consumed or entertainment enjoyed by the taxpayer or would be so required but for the "Remote Work Location" exemption in subparagraph 6(6)(a)(ii) of the Act (paragraph 67.1(2)(d) of the Act); or

ii) is an amount that would, but for the "Special Work Site" exemption in subparagraph 6(6)(a)(i), be required to be included in computing any taxpayer's income for a taxation year because of the application of section 6 in respect of food or beverages consumed or entertainment enjoyed by the taxpayer and is paid or payable in respect of the taxpayer's duties performed at a work site in Canada that is:

(A) outside any urban area, as defined by the last Census Dictionary published by Statistics Canada before the year, that has a population of at least 40,000 individuals as determined in the last census published by Statistics Canada before the year, and

(B) at least 30 kilometres from the nearest point on the boundary of the nearest such urban area (subparagraph 67.1(2)(e) of the Act);

In relation to (i) above, we note that paragraph 6(1)(a) of the Act requires that a taxpayer's income from an office or employment include the value of benefits of any kind whatever received or enjoyed in the year in respect of, in the course of, or by virtue of, an office or employment, with certain limited exceptions. This includes the payment of an employee's personal living expenses, such as the Disbursements in the present case.

Whether the Taxpayer qualifies for either the remote work location or the modified special work site exemption mentioned above is a question of fact that is outside the scope of this response. You may wish to refer to Interpretation Bulletin IT-91R4, Employment at Special Work Sites or Remote Work Locations, available on the CRA website, for further information thereon. However, if the Disbursements are required to be included in computing the Individual's employment income because of the application of section 6 of the Act or would be so required but for the remote work location or the modified special work site exemption mentioned above, the Corporation may deduct 100% of the Disbursements paid pursuant to paragraph 67.1(2)(d) or (e) of the Act.

The foregoing is premised on the assumption that the Disbursements are reasonable for purposes of section 67 of the Act and that the individual receives them in his capacity as an employee of the Taxpayer rather than in his capacity as a shareholder.

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