GST/HST Policy Statement P-075R

Allowances and reimbursements

Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

Date of Issue

July 6, 2004.

This policy statement cancels P-075, last updated January 1, 1995 and last printed July 22, 1993.

Subject

Allowances and reimbursements

Legislative Reference(s)

Sections 169, 174, 175, 175.1, 236, 253, 259 and 272.1 of the Excise Tax Act (ETA) and section 6 of the Income Tax Act (ITA)

National Coding System File Number(s)

11650-8

Effective Date

January 1, 1991 for GST and April 1, 1997 for HST

Issues and Decisions:

Issue

The meaning of the terms “allowance” and “reimbursement” for purposes of sections 174, 175, 175.1, 236, 253, 259, and 272.1 of the ETA.

Decision

For the purposes of sections 174, 175, 175.1, 236, 253, 259, and 272.1 of the ETA, the terms “allowance” and “reimbursement” are interpreted to have the same meaning that they have for income tax purposes.

An allowance is any periodic or other similar payment that a person receives from another person, without having to account for its use. An amount constitutes an allowance for the purposes of section 174, 236, 253 and 259 of the ETA where the amount meets all of the following criteria:

• The amount paid must be a predetermined amount;
• The amount must be paid for a certain purpose;
• The amount paid must be at the complete disposition of the person receiving the payment; and
• There is no requirement for the person receiving the payment to repay or account for its use. The person receiving the payment does not have to demonstrate that the amount was actually spent (i.e., the employee is not required to provide receipts or documentation to the employer).

In contrast, a reimbursement is a payment made by one person to repay another person for amounts spent. An amount constitutes a reimbursement where the amount is fully accounted for by the person receiving the payment (i.e., evidenced by supporting vouchers or records).

Discussion

Reasonable allowances

In order for a person paying an allowance to be entitled to claim an input tax credit or rebate in respect of an allowance, the person must first satisfy the conditions set forth under section 174 of the ETA. In the case of an allowance to which subparagraphs 6(1)(b)(v), (vi), (vii) or (vii.1) of the ITA apply, these allowances essentially have to be reasonable for section 174 of the ETA to apply.

Subparagraphs 6(1)(b)(x) and (xi) of the ITA consider an allowance paid to an employee for using a motor vehicle in connection with the activities of the employer to be reasonable only if the the following conditions apply:

• The allowance is based only on the number of kilometres driven in a year;
• The rate per kilometre is reasonable; and
• The employee is not reimbursed for expenses related to the same use of the motor vehicle, other than a reimbursement for supplemental business insurance, toll or ferry charges, not already included in the allowance.

A flat rate motor vehicle allowance paid to an employee is not considered to be a reasonable allowance for the purposes of subparagraph 6(1)(b)(vii.1) of the ITA by virtue of subparagraph 6(1)(b)(x) of the ITA. Furthermore, where an employee receives both a monthly flat rate amount and a cents per kilometre rate allowance from an employer for the same use of that individual’s motor vehicle, the total combined allowance is not considered “reasonable”, because it is not based solely on the number of kilometres for which the vehicle is used.¹ In these circumstances, no tax is deemed to have been paid by the employer under section 174 of the ETA in respect of the allowance and the employer will not be entitled to claim an input tax credit or rebate in respect of the allowance.

Moving allowances

This policy paper is consistent with the income tax guidelines concerning moving allowances. A moving allowance of up to $650 is treated as a non-taxable reimbursement to the employee, as long as the employee certifies that the amount was spent on moving expenses. Consequently, this amount is eligible as a reimbursement under section 175 of the ETA. The person paying the amount is then able to claim an input tax credit, or rebate, on the reimbursed amount, subject to any other restrictions in the ETA. The amount of a moving allowance, which is required to be included in an individual’s income as a taxable benefit, is not considered to be an allowance pursuant to section 174 of the ETA.

Allowances and reimbursements that are taxable benefits to individuals

Sections 174 and 175 permit an employer to recover by way of an input tax credit or rebate the GST/HST paid by an employee on expenses, which if incurred directly by the employer, would be recoverable as input tax credits or rebates. An allowance or reimbursement that results in a taxable benefit to the individual under the ITA is for the personal benefit of the individual and is in reality remuneration or income of the individual. As income, the payment is not subject to GST/HST and hence not eligible for purposes of determining an input tax credit or rebate entitlement under the ETA.

Allowances and reimbursements paid to members of a partnership or volunteers

This policy not only applies to allowances and reimbursements paid to an employee (by the employer) but also to such payments made to a member of a partnership (by the partnership), and to such payments made to a volunteer who gives services to a charity or public institution (by the charity or public institution).

Examples

Example No. 1

Facts

Issue

Whether the amount paid to the employee would be considered an “allowance” or a “reimbursement” for GST/HST purposes, whether or not the employer would be entitled to claim an input tax credit in respect of the amounts paid to the employee, and whether or not the employee may file an Employee & Partner GST/HST Rebate claim for the GST/HST paid in respect of the motor vehicle expenses incurred by the employee.

Comments

In this case, the monthly payment made by the employer to the employee would be considered an “allowance” rather than a “reimbursement” since the employee was not required to account for the use of the payment and the amount paid was at the complete disposition of the employee.

The allowance would be required to be included in the employee’s income under paragraph 6(1)(b) of the ITA, since it would not be excluded from income under subparagraph 6(1)(b)(vii.1) of the ITA by virtue of subparagraph 6(1)(b)(x) of the ITA. The allowance would not be considered a “reasonable” allowance.

Since the employer would be required to include the “unreasonable” flat rate allowance for the motor vehicle in the employee’s income, one of the conditions under section 174 of the ETA would not be satisfied. As such, the employer would not be deemed to have paid tax in respect of the allowance under section 174 of the ETA. Consequently, the employer would not be entitled to claim an input tax credit in respect of the motor vehicle allowance.

Where the registrant employer certifies that it did not consider the allowance to be a “reasonable” allowance at the time it was paid, the employee may be entitled to claim an Employee & Partner GST/HST Rebate, in accordance with section 253 of the ETA, in respect of the tax paid on motor vehicle expenses incurred if the expenses were deducted by the employee for the year for income tax purposes.

Example No. 2

Facts

Issue

Whether or not the amount paid to the employee is an “allowance” or a “reimbursement” for GST/HST purposes, and whether the amount paid to the employee qualifies for an input tax credit for the employer.

Comments

In this case, the registrant employer requested that the employee incur expenses in relation to the employer’s activities. The amount that the employer paid to the employee covered the cost of the supplies, plus the relevant GST paid by the employee. The employee provided the required receipts to the employer demonstrating the amount that was indeed spent. Therefore, the amount paid by the employer to the employee would be considered a reimbursement.

Subsection 175(1) of the ETA will deem, amongst other things, the employer to have paid tax in respect of these supplies that is included in the reimbursed amount. As a result, the employer will be eligible to claim an input tax credit in the normal manner.

Example No. 3

Facts

Issue

Whether the amounts paid to the employee are “reimbursements” or “allowances” for GST/HST purposes, and whether or not the employer would be entitled to claim an input tax credit in respect of the amounts paid to the employee.

Comments

The amounts paid to the employee for the hotel accommodation and meal expenses are reimbursements, since the employee was required to present receipts for expenditures on hotel accommodation and meals.

The $650 amount that the employee certified was paid for moving expenses is a reimbursement.

The employer is deemed under subsection 175(1) of the ETA to have paid tax in respect of the expenses included in the reimbursed amounts. As a result the employer would be eligible to claim an input tax credit in the normal manner.

Since no receipts or accounting were required to be provided to the employer with respect to the $6,350 amount and since the amount met the other criteria for being an allowance, namely that the amount was paid for a certain purpose, and it was a predetermined amount, the amount is considered to be an allowance.

The employer is not deemed under subsection 174 to have paid tax in respect of the $6,350 allowance. The allowance is paid as remuneration of the individual, and therefore, section 174 does not apply to this allowance.

The $6,350 incidental moving allowance is an allowance for which the employer is not entitled to an input tax credit.

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Footnote

¹ This coincides with changes in policy for income tax purposes in relation to motor vehicle allowances, effective January 1, 2001.