2 August 2002 GST/HST Interpretation 36715 - Eligibility for ITCs on Allowances

Dear XXXXX:

Thank you for your facsimile of XXXXX, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to allowances paid by an association. We apologize for the delay in our response.

We understand that a client of yours is an association that is a non-profit organization that provides audit assessment services to its members. These audit services are taxable and the association charges GST on these supplies.

Members of the association "lend" their employees to perform an audit on another member company. In other words, Company A provides an employee to the association to perform an audit of Company B. These individuals conduct the audit solely on behalf of the association. The individuals continue to collect their salaries as employees of the member company.

The association provides a daily meal allowance as well as a mileage allowance to the individuals performing the audits. The allowances are considered reasonable for GST purposes.

Interpretation Requested

Can the association claim input tax credits (ITCs) on these allowances, given that these individuals are performing the audits on behalf of the association?

Interpretation Given

Pursuant to section 174 of the Excise Tax Act (ETA), a person who is an employer, partnership, charity or public institution is able to treat eligible allowances paid for certain expenses as if the expenses had been incurred by the person directly. The person is then able to claim an ITC or rebate in respect of these allowances.

In addition to the requirements that the allowance be for taxable purchases, that it be considered reasonable, and that an amount in respect of the allowance is deductible in computing the income of the person for purposes of the Income Tax Act, the person must pay the allowance to an employee of the person; where the person is a partnership, to a member of the partnership; or where the person is a charity or a public institution, to a volunteer who gives services to the charity or public institution.

There is no provision in the ETA to allow a person to claim an ITC or rebate for allowances paid to individuals who are not that person's employees. It is a question of fact, however, as to whether or not the employees of the "lending" company are employees of the association during the period of the audit. Common law recognizes that more than one employer can employ a person. The courts have found that a person can be employed by a firm that controls the employee's day-to-day work at the same time as by another firm that issues T4 slips to the individual and deducts the employee's income tax, employment insurance and CPP payments.

Factors to consider include whether the association has the right to control the amount, the nature, and the management of the work to be done and the manner of doing it. Does the association provide the required equipment and tools to perform the work? Does the association borrow individuals from the member companies to perform an audit that it controls, or does Company A contract with the association to perform the audit on the association's behalf? Depending upon the facts of the situation, the auditors could possibly, during the period of the audit, be employees of both the company and the association.

Also note that if the association borrows individuals from the member companies to perform the audit and pays a fee to the lending member company, this fee may be subject to GST if it is consideration for a taxable supply.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-9592.

Yours truly,

Helena Ingr
Charities, NPOs and Educational Services Unit
PSBs and Governments Division
Excise and GST/HST Rulings Directorate