19 February 1999 Income Tax Severed Letter e9833385.txt - AUTOMOTIVE TECHNICIAN TOOL 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.

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: Is a tool allowance subject to withholding taxes, CPP, and EI premiums.

Position: Yes.

Reasons: It is a taxable benefit per paragraph 6(1)(a) and subject to withholding tax per 153(1). It is also subject to CPP and EI premiums per their respective Acts.

XXXXXXXXXX 	983338
		David Shugar
Attention: XXXXXXXXXX 

Dear XXXXXXXXXX:

Re: Technician Tool Allowance

This is in reply to your letter of October 5, 1998 in which you state that you would like to know whether you are in compliance with the Income Tax Act (the “Act”) regarding withholding of tax on the tool allowance paid to your technicians. Your technicians are paid $XXXXXXXXXX an hour for usage and depreciation of their tools. In a phone conversation on January 19, 1999 (XXXXXXXXXX/Shugar), you indicated that you would also like to know whether the tool allowance is subject to Canada Pension Plan (CPP) and Employment Insurance (EI) premiums.

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.

By virtue of paragraph 6(1)(a) of the Act, benefits of any kind must be included in the income of a taxpayer. 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 Act. You should note that paragraph 23 of Interpretation Bulletin IT-470R states that where an employer makes payments to its employees to offset the cost of tools they are required to have in order to perform their work, the amount of the payment must be included in the employees’ incomes.

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.

Regarding the employer’s obligation to deduct tax in respect of a benefit or an allowance, subsection 153(1) of the Act requires that every person paying salary or wages or other remuneration at any time in a taxation year withhold therefrom, amounts determined in accordance with prescribed rules. Subsection 248(1) defines “salary or wages” as “... the income of a taxpayer from an office or employment as computed under subdivision a of Division B of Part I...”. Since subdivision a includes benefits and allowances described under paragraphs 6(1)(a) and 6(1)(b), a benefit received by virtue of those paragraphs is included in salary. In our view, the tool allowance you describe is a benefit under paragraphs 6(1)(a) or 6(1)(b) and is subject to the withholding of tax.

Subsection 12(1) of the Canada Pension Plan (CPP) states:

“The amount of contributory salary and wages of a person for a year is his income for the year from his pensionable employment, computed in accordance with the Income Tax Act, ...”

Accordingly, the tool allowance is included in ‘contributory salary and wages’ and is subject to CPP premiums.

For purposes of the Employment Insurance Act (EI), subsection 2(1) of the Insurable Earnings and Collection of Premium Regulations states:

“...the total amount of earnings that an insured person has from insurable employment is
(a) the total of all amounts, whether wholly or partly pecuniary, received or enjoyed by the insured person that are paid to the person by the person’s employer in respect of that employment, and...”

Accordingly, the tool allowance is included in ‘insurable earnings’ in the EI legislation and is subject to EI premiums.

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