14 May 2003 External T.I. 2003-0001915 - ALLOWANCE PAID TO TRANSPORT

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether an allowance computed as a percentage of a transport employee's gross income would be non-taxable pursuant to subparagraph 6(1)(b)(vii); whether away-from-home expenses based on percentage of allowance would be deductible

Position: Question of fact; not acceptable method for computing away-from-home expenses. Claim must be computed in manner outlined in IC 73-21R7, and must be reduced by amount of tax-free allowance received in respect of such expenses.

Reasons: Allowance must be reasonable. Employer must show that there is a relation between the employee's gross income and the employment-related travel expenses incurred, and that the percentage used approximates the expenses incurred; Consistent with prior opinions

XXXXXXXXXX Wayne Antle, CGA
2003-000191
May 14, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is further to your correspondence with XXXXXXXXXX on December 2, 2002, and your letter to XXXXXXXXXX dated December 20, 2002. As per your request, your file has been referred to our office for comment.

Our understanding of the facts is as follows:

XXXXXXXXXX is a transportation company operating under the name of XXXXXXXXXX ("Xco"). Xco employs approximately XXXXXXXXXX long-distance truck drivers (the "employees"), who travel within Canada and the United States. Pursuant to the employment contract between Xco and the employees, the employees are paid a gross income consisting of the following:

1. Basic mileage rate that increases with years of service.

2. Mileage bonus ($XXXXXXXXXX per mile) for employees who drive more than XXXXXXXXXX miles in XXXXXXXXXX pay periods.

3. Safety bonus ($XXXXXXXXXX per mile) if no accidents are incurred within the XXXXXXXXXX month reference period.

4. Pick-up and Delivery allowance ($XXXXXXXXXX to $XXXXXXXXXX per pick-up or delivery).

5. Turn around bonus of $XXXXXXXXXX for employees who travel to the United States immediately after returning to Xco's yard.

6. Compensation of $XXXXXXXXXX per layover.

7. Wait time at $XXXXXXXXXX per hour in excess of XXXXXXXXXX hours for full loads and XXXXXXXXXX hours for pick-ups and deliveries.

8. Up to $XXXXXXXXXX per day for delays caused by equipment breakdown

9. Hand baum of $XXXXXXXXXX.

10. XXXXXXXXXX% reimbursement for cost of uniforms.

11. Compensation of $XXXXXXXXXX for switches made outside of Xco's yard.

12. XXXXXXXXXX of group insurance premiums for employees with XXXXXXXXXX or more years of service.

Under the terms of the employment contract, each employee's gross income is broken into taxable remuneration, and an amount to cover the employee's expenses (the "expense amount"). The taxable remuneration is calculated as XXXXXXXXXX% of the gross income, and the remainder represents the expense amount.

Xco is currently the subject of an employer compliance audit being undertaken by the XXXXXXXXXX Tax Services Office (the "TSO"). The TSO is proposing to include the expense amount in each employee's income pursuant to paragraph 6(1)(b) of the Income Tax Act (the "Act") on the basis that it is an allowance that does not meet the requirements for exemption in subparagraph 6(1)(b)(vii) of the Act. According to the TSO, since the allowance is not computed with reference to time travelling away from the municipality in which the regular workplace is located, it does not fall within subparagraph 6(1)(b)(vii). The TSO is relying on a technical interpretation given by this directorate (File No. 9626295) and the case of Marcoux v. MNR (91 DTC 478).

Your Views

You feel that the Marcoux case is not relevant because it was based on earlier wording in subparagraph 6(1)(b)(vii), which explicitly referred to the allowance being computed with reference to time travelling away from the municipality. Likewise, since our earlier technical interpretation relied on this case, it is also not applicable. In your view, the expense amount meets the requirements of subparagraph 6(1)(b)(vii) as it now reads, and is therefore not taxable.

Furthermore, even if subparagraph 6(1)(b)(vii) does not apply, you feel that the expense amount would not be taxable because no economic advantage was conferred on the employees. The expense amount is, in effect, a reimbursement of employment-related expenses, and not an allowance. In this regard, you cite the cases of The Queen v. Huffman (90 DTC 6405) and The Queen v. Hoefele et al (95 DTC 5602).

Finally, you note that under the Insurable Earnings and Collection of Premiums Regulations, if an amount is excluded from income under either paragraph 6(1)(a) or (b) of the Act, it will not be subject to employment insurance premiums.

Our Comments

The tax treatment of the expense amount would depend upon whether it is an allowance or a reimbursement of expenses. The issue of whether a payment constitutes an allowance or reimbursement was considered by the Federal Court of Appeal in the case of A.G of Canada v. Roland M. MacDonald (94 DTC 6262). In this case, the Court found that an allowance for tax purposes is (i) an arbitrary amount in that it is a predetermined sum set without specific reference to any actual expense or cost, (ii) usually for a specific purpose, and (iii) at the discretion of the recipient in that the recipient need not account for the expenditure of the funds towards an actual expense. On the other hand, a reimbursement is considered to be a repayment made to a person with respect to an expense or loss incurred. Although the allowance must be a predetermined sum set without specific reference to an actual cost or expense, the Court commented in its decision that this did not preclude the amount from being determined with reference to a projected or average expense or cost. Paragraph 40 of IT-522R, Vehicle, Travel and Sales Expenses of Employees, defines the word "allowance" for the purpose of the bulletin, as "any periodic or other payment that an employee receives from an employer, in addition to salary or wages, without having to account for its use".

We feel that the expense amount is an allowance within the guidelines outlined above. It is a pre-determined sum based on an arbitrary formula, and the employees do not have to account for the use of the funds when received. Since the expense amount is not a reimbursement of employment related expenditures, the decisions in the Hoefele and Huffman cases are not applicable to this situation. These cases dealt with whether a reimbursement of expenses would constitute a taxable employment benefit under paragraph 6(1)(a) of the Act, and are not relevant to allowances received.

We feel that the issue in this case is whether the allowance would be considered taxable employment income pursuant to paragraph 6(1)(b) of the Act. Paragraph 6(1)(b) includes in income "all amounts received by the taxpayer in the year as an allowance for personal or living expenses or as an allowance for any other purpose" unless it falls within one of the specific exceptions in the Act. In your particular situation, the relevant exception is found in subparagraph 6(1)(b)(vii) of the Act. This provision applies where an allowance for travel expenses, other than a motor vehicle allowance, is received by an employee (other than one employed in connection with the selling of property or negotiating of contracts for the employer), and

? the allowance is a reasonable amount,
? the allowance is received for travelling away from the municipality and the metropolitan area (if there is one) where the employer's establishment, at which the employee ordinarily worked or to which the employee ordinarily reported, is located, and
? the travelling is done in the performance of the duties of the office or employment.

While we agree with your comments that the provision no longer explicitly requires that the allowance be computed with reference to time travelling away from the municipality, subparagraph 6(1)(b)(vii) requires that the allowance be reasonable in the circumstances. In our view, we would expect that a reasonable allowance paid to long-distance truck drivers would normally be calculated on the basis of time travelling away from the municipality where the employer's establishment is located. In the absence of all the relevant information, it is unclear to us whether the method used by Xco to compute the allowance will, in fact, result in the calculation of a reasonable allowance for travel-related expenses. The expense amount is based on a percentage of gross income paid to the employees. Gross income includes a higher basic mileage rate and payment of part of the group insurance premiums for senior employees, reimbursement for part of the cost of uniforms, and safety bonuses. In our view, it is difficult to imagine a correlation between some of the elements included in gross income, and the amount of employment-related travel expenses incurred by the employees.

In order to support your position, we feel that you would have to demonstrate to the TSO that there is a relationship between the amount of gross income earned by the employees and the average employment-related travel expenses or costs that the employees will incur (even though they do not have to account for it) on an ongoing basis. Further, you must be able to establish that 19% of gross income is a reasonable approximation of the expenses that would be incurred by the employees for travelling in the course of their employment.

The TSO has also noted that the employees are claiming away-from-home expenses pursuant to paragraph 8(1)(g) of the Act with respect to the same travel for which they receive the expense amount. The employees are calculating the amount of the expenses claimed as 50% of the expense amount received from Xco. This is not an acceptable method for computing away-from-home expenses. Please refer to Information Circular IC 73-21R7 Away-from-home Expenses for a detailed discussion of the acceptable methods for computing this claim. In addition, where an employee is in receipt of an allowance that is not taxable pursuant to subparagraph 6(1)(b)(vii) of the Act, we feel that the amount claimed for away-from-home expenses under paragraph 8(1)(g) of the Act should be reduced by the amount of this allowance since it is intended to cover these expenses.

Finally, with respect to whether the expense amount is subject to employment insurance premiums, we agree with your comments that the insurability of such income will depend upon whether it is included in employment income pursuant to paragraph 6(1)(a) or 6(1)(b) of the Act.

We trust that our comments will be of assistance.

Yours truly

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

- 4 -