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: Where a payment received for work-related travel expenses exceeds the costs incurred, is the excess amount included in income under the Act.
Position: It is a question of fact, in this case most likely yes.
Reasons: See response.
Author: Underhill, Cynthia
Section: 6(1)(a), 6(1)(b), 6(1)(b)(vii), 9(1), 18(1)(a), 18(1)(p), 67, 67.1, 125(7), 248(1)
February 25, 2016
Re: Payments received for work-related travel expenses
We are writing in response to your faxes dated October 5, 8, and 20, 2015, concerning the taxation of payments received for work-related travel expenses. In particular, you asked whether the excess of the payment received over the costs incurred is included in income under the Income Tax Act (Act).
In the situation described, an individual is an employee and shareholder of a corporation that carries on XXXXXXXXXX. The individual receives a payment for work-related travel expenses from XXXXXXXXXX. The amount received exceeds the costs incurred by the individual.
All legislative references are to provisions of the Act.
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations. As per our discussion (Erskine/XXXXXXXXXX) on October 20, 2015, IC 70-6R6 also outlines what information should be included with a technical interpretation request. A copy of IC 70-6R6 is enclosed for your convenience.
For the purposes of paragraph 6(1)(b), the Canada Revenue Agency (CRA) generally considers an allowance to be any periodic or other payment that is received without having to account for its use (i.e., no detailed receipts are provided). Your fax dated October 8, 2015, specifies that the amount received exceeds the actual costs incurred. Therefore, the payment would likely be considered an allowance.
The income tax treatment of an allowance received to cover work-related expenses depends on if the allowance was received in the individual’s capacity as an employee or on behalf of the corporation as business income. Whether an allowance was received in the individual’s capacity as an employee or on behalf of the corporation, is a question of fact.
Payment received in capacity as an employee
Generally, paragraph 6(1)(b) requires that all allowances received by an employee for personal or living expenses be included in his or her income as income from employment. However, there are a number of exceptions to this general rule. In particular, subparagraph 6(1)(b)(vii) specifically excludes from income reasonable travel allowances received by an employee from the employer for travelling while working away from the municipality (and the metropolitan area, if there was one) where the employer’s establishment, at which the employee ordinarily worked, was located.
The Act does not define reasonable for the purposes of subparagraph 6(1)(b)(vii). Whether a travel allowance is reasonable is always a question of fact to be considered in light of all the relevant circumstances. It is our view that an allowance that approximates the out-of-pocket expenses an employee could be expected to incur while travelling for work would generally be considered reasonable for purposes of subparagraph 6(1)(b)(vii), provided the costs themselves are reasonable. Relevant factors to consider in determining if a travel allowance is reasonable for the purposes of subparagraph 6(1)(b)(vii) may include:
* the average cost of ordinary meals and lodging in the area to which the employee is travelling;
* the availability of meals and lodging in the proximity of the location where the employee is working while away;
* whether the employee is likely to have some meals or lodging provided to him or her at no cost; and
* the amounts paid to Canadian federal employees while travelling on government business (commonly referred to as the Treasury Board of Canada Secretariat rates).
Whether the amounts paid in a particular situation are reasonable is a question of fact that must be determined on a case-by-case basis.
Consistent with comments in paragraph 41 of Interpretation Bulletin IT-522R, Vehicle, Travel and Sales Expenses of Employees, where the CRA considers an allowance to be unusually high (e.g., higher than the Treasury Board of Canada Secretariat rates), the employer should ensure that receipts, vouchers, or other acceptable evidence are available to show that the allowance is not in excess of a reasonable amount. Where it is determined that the amount received by an employee exceeds a reasonable amount, the entire amount is included in the employee’s employment income under paragraph 6(1)(b). In that case, a deduction may be available to the employee if the particular expense is specifically identified in section 8 and provided the conditions in section 8 are satisfied.
Payment received by or on behalf of the corporation
Under subsection 9(1), income from a business or property is the “profit” therefrom for the year, subject to the particular rules set out in Part I of the Act. Generally speaking, an amount received (e.g., an allowance) in respect of an outlay or expense incurred by a taxpayer (e.g., a corporation) carrying on a business is included in the taxpayer’s business income under subsection 9(1), regardless of whether the amount exceeds a reasonable amount.
An outlay or expenditure incurred by a taxpayer carrying on a business is generally deductible if it is incurred for the purpose of gaining or producing income from the business in accordance with paragraph 18(1)(a) and is not otherwise prohibited by a specific provision of the Act, such as paragraphs 18(1)(b), (c) or (h). In addition, section 67 provides that an outlay or expenditure is only deductible to the extent that it is reasonable in the circumstances. The determination of the deductibility of any outlay or expense can only be determined on a case-by-case basis since it requires an understanding of the relevant facts and circumstances.
If the taxpayer is a corporation and is determined to be carrying on a personal service business as defined in subsection 125(7) (see paragraph 18 of IT-73R6, The Small Business Deduction), paragraph 18(1)(p) will limit the expenses that may be deducted. The paragraph restricts the expenses to (among others):
* the salary, wages, or other remuneration paid to an incorporated employee in the year;
* the cost to the corporation of providing any benefit or allowance to an incorporated employee in the year.
In order for any of the abovementioned expenses to be deducted under paragraph 18(1)(p), it must also be established that the expense would have been deductible to the corporation if it were not carrying on a personal service business.
We trust these comments will be of assistance.
Nerill Thomas-Wilkinson, CPA, CA
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate
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