2017-0695931E5 Representation or other special allowances

Principal Issues: Whether allowances provided to employees are representation or special allowances for the purposes of subparagraph 6(1)(b)(iii) of the Income Tax Act and excluded from income under that subparagraph.

Position: Likely yes.

Reasons: See response.

Author: Baltkois, Thomas
Section: 6(1)(b)(iii); 250(1)(d); Reg. 3400

XXXXXXXXXX                                                                                                              2017-069593
                                                                                                                                      T. Baltkois
January 31, 2019

Dear XXXXXXXXXX:

Re: Representation or other special allowances

We are writing in response to your correspondence of October 19, 2016, which was forwarded to the Business and Employment Income Section on March 30, 2017. Thank you for your understanding regarding the delay of this response.

In your correspondence, you asked:

1.    Whether an international development assistance program that will be undertaken by XXXXXXXXXX (“Employer”) and funded by Global Affairs Canada (“GAC”) will be a prescribed international development assistance program of the Government of Canada, referred to in paragraph 250(1)(d) of the Income Tax Act (“Act”) and described in Regulation 3400. Regulation 3400 requires such a program to be an international development assistance program of the Canadian International Development Agency (“CIDA”) but CIDA was disbanded in 2013 and its function taken over by GAC.

2.    Whether certain amounts, described below, to be paid to a Canadian resident individual who left Canada to perform services outside Canada under the international development assistance program described in (1) will be non-taxable representation or other special allowances under subparagraph 6(1)(b)(iii) of the Act, or will be taxable amounts under subsection 5(1), paragraph 6(1)(a), paragraph 6(1)(b) or another provision.

Our understanding of the situation you described:

*     the Employer received funding to undertake an international development assistance program outside Canada;

*     the Program is financed by GAC with funds provided under External Affairs Vote 30a, Appropriation Act No. 3, 1977-78, or another vote providing for such financing;

*     an employee, who is a resident of Canada, left Canada to perform services in a country outside Canada under the international development assistance program;

*     in addition to the employee’s regular salary, the employee was entitled to receive the following payments:

a.    Post Living Allowance (PLA) – Paid to the employee to compensate for the higher costs of purchasing goods and services in the city of assignment;

b.    Post Differential Allowance (PDA) – Paid to the employee to compensate for hardship conditions in the city of assignment resulting from such factors as geographical isolation, language barriers, cultural differences, quality and availability of goods (such as bottled water), restrictions on possible leisure activities, unsanitary conditions, prevalence of diseases, lack of good health care facilities and threats to personal safety; and

c.    Overseas Service Premium (OSP) – Paid to the employee as an incentive to serve outside Canada.

Our comments

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 70-6R8, Advance Income Tax Rulings and Technical Interpretations.

Generally, an allowance received by an employee for personal or living expenses is included in income under paragraph 6(1)(b) of the Act, unless it falls within the exceptions listed in subparagraphs 6(1)(b)(i) to (ix) of the Act. In this regard, subparagraph 6(1)(b)(iii) of the Act excludes from income, representation or other special allowances received in respect of a period of absence from Canada, by employees who are deemed to be residents of Canada under paragraph 250(1)(b), (c), (d) or (d.1) of the Act. These employees include members of the Canadian Forces, diplomatic staff, and individuals who perform services under a prescribed international development assistance program of the Government of Canada and that were residents in Canada at any time during the three months prior to commencing those services.

We consider that the programs of GAC (GAC being the new name of the organization Foreign Affairs, Trade and Development Canada, which was created as a result of the amalgamation of CIDA and the Department of Foreign Affairs and International Trade) that otherwise meet the requirement under Regulation 3400 to be prescribed international development assistance programs of the Government of Canada.

Representation or other special allowances

The phrase “representation or other special allowances” is not defined in the Act. However, we generally consider a representation or other special allowance to be an amount paid to an employee who is transferred or assigned to work outside of Canada, and who has different living conditions, or incurs higher living costs. The allowance is generally designed to compensate for the inconveniences arising from different living conditions or additional expenses incurred (for example, accommodation, food, and travel) because of the employee’s work outside of Canada.

Based on the information provided, the PLA, PDA, and OSP described would likely be considered representation or other special allowances for purposes of subparagraph 6(1)(b)(iii) of the Act, and excluded from an employee’s income provided that the employee was resident in Canada at any time in the three month period preceding the day on which his or her work commenced outside Canada.

We trust these comments will be helpful.

Yours truly,

Nerill Thomas-Wilkinson, CPA, CA
Manager
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2019

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2019