15 March 2001 GST/HST Ruling 31165 - Section 174 of the Excise Tax Act (ETA) and "Per-diem" Staff Allowances

Dear XXXXX:

This letter is in response to your letter of April 5, 2000, your facsimile message of November 14, 2000, and several conversations we have had concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a $40 "per-diem" staff allowance paid by XXXXX ("the Management Company") to its employees.

Statement of Facts

Our understanding of the facts, the transaction(s), and the purpose of the transaction(s) is as follows:

1. The Management Company is a company formed to oversee the construction XXXXX[.]

2. The Management Company is a GST/HST registrant, and makes taxable supplies from its head office located in XXXXX.

3. The Management Company constructed XXXXX XXXXX from 1990–1997 XXXXX.

4. The Management Company used its own staff and many contractors to accomplish the construction project.

5. The construction process took place at a remote construction site and camp built by the Management Company XXXXX.

6. Workers were normally required to be away from home for more than 36 hours.

7. For purposes of the Income Tax Act (ITA), the construction camp at XXXXX is both a "special work site" and a "remote work location".

8. Initially, the Management Company housed the construction workers at accommodation facilities built at the XXXXX construction site.

9. Around November 1994, the Management Company realized they were experiencing a shortage of staff accommodations at the XXXXX Construction site and agreed to pay $40 per day as a "Per-Diem Staff Allowance" to any employee (or contractor's employee) who would surrender their accommodation privileges.

10. Although the staff "per-diem" is referred to as a "transportation allowance" in the XXXXX, in fact, not all of the amounts were necessarily spent for travel to and from the work site. Some amounts were spent on meals and accommodation.

11. The amount of $40 per day for the allowance was arrived at by duplicating standard subsistence daily rates paid by Union Collective Agreements in effect at that time. The allowance was "all-inclusive" and no separate component or allocation was provided for accommodation, food or travel.

12. The amount of the allowance is a deductible expense to the Management Company under the ITA. No amount of the allowance paid is required to be included in the income of the employees under the ITA.

13. Many of the costs associated with travel to and from the work site are taxable for GST/HST purposes.

14. The purchased accommodations could be either taxable hotel rooms, or exempt long-term accommodation. Replacing mess privileges would mean that employees would have to acquire prepared meals, which are taxable supplies, or purchase groceries which may or may not be zero-rated, depending on the nature of the goods. Replacement camp activities (e.g., laundry, housekeeping, messaging) are taxable for GST/HST purposes.

15. The allowance paid by the Management Company, while described as a "transportation allowance" was considered to be a reasonable approximation of the local costs that would be incurred in obtaining transportation, meals and lodging.

16. The Management Company has no knowledge of how the allowances were actually spent once paid to the employees. The Management Company was not required to document how the employees spent these allowances, since the allowances were "unaccountable".

17. Some of the individual's receiving the allowance used the funds for purposes other than acquiring taxable supplies. The Management Company has no knowledge as to the precise numbers, control, or direction over how the individuals spent their allowances.

Ruling Requested

Where the Management Company pays a "per-diem" staff allowance to an employee, you would like to confirm that the Management Company will be deemed to have received a supply of property or service and that any consumption or use of the property or service by the employee will be deemed to be consumption or use by the Management Company. As well, you would like to confirm that in these circumstances, the Management Company will also be deemed to have paid tax under section 174 of the ETA with respect to the allowance.

Ruling Given

Based upon our understanding of the facts, it is our view that the Management Company has not satisfied the requirements under subparagraph 174(a)(iv) of the ETA with respect to the $40 per day allowance. As such, the deeming provisions under section 174 of the ETA will not apply to the allowance in question.

Explanation

You have not presented as a fact that the Management Company paid the allowance for supplies, all or substantially all of which are taxable supplies (other than zero-rated supplies). This is a condition that must be satisfied for the purposes of section 174 of the ETA. You have requested that we rule on the issue of whether or not the Management Company has indeed paid an allowance to employees for supplies, all or substantially all of which are taxable supplies (other than zero-rated supplies). It is our view that this is a question of fact.

It is our understanding that there were insufficient hotel rooms to accommodate employees in receipt of the $40 per day allowance in the area close to the work location. As well, it is our understanding that the vast majority of employees were staying in exempt accommodations, given that there were very few hotel rooms available in such a small town. Furthermore, the amount paid to employees seems more consistent with an amount paid to cover exempt accommodation, rather than an amount to cover accommodations in a hotel. Given that a significant portion of the allowance was paid for exempt accommodations, it is our view that the allowance was not paid for supplies, all or substantially all of which were for taxable supplies.

It is our view that it can be appropriate for the CCRA to consider factors such as the make up of the community or area in which employees are staying when determining whether or not a particular allowance has indeed been paid for supplies, all or substantially all of which are taxable supplies (other than zero-rated supplies). For example, if the employees of a particular registrant had been staying in a town with only a grocery store, and the town had no restaurants, and the employees of the registrant were paid a daily meal allowance, it would be "reasonable" for the CCRA to challenge the purpose and intent of the allowance if the registrant took the position that the allowance was paid for taxable meals in restaurants rather than zero-rated groceries.

To illustrate our point further, if we were to take the example of a hypothetical registrant which "reimbursed" an employee (rather than paid an allowance) for exempt accommodations and zero-rated groceries, the registrant would not have been deemed to have paid tax in respect of the "reimbursement" under subsection 175(1) of the ETA. As such, there would have been no input tax credit entitlements to the registrant with respect to the reimbursement. Furthermore, where a hypothetical registrant actually paid for such exempt or zero-rated expenditures (rather than having reimbursed an employee), once again there would be no input tax credit entitlements to the registrant.

In the case at hand, since you have advised that the allowance was fully deductible for income tax purposes, the Management Company may be in a position to take advantage of the income tax benefits that flow from this deduction. I regret that a more favourable response could not be provided in regards to this matter.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-9699.

Yours truly,

Douglas Wood, CGA
A/Technical Analyst
General Operations Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate