Chapter 3: Inclusions—Allowances, Allowance vs. Reimbursement and Advances Flashcards
What is the difference between an allowance, reimbursement, and an advance?
Reimbursement: An amount paid to an employee to cover expenses they incurred for the employer’s business. It has no tax consequences for the employee.
Advance: Funds provided to an employee before an expense is incurred, which are then accounted for after the activity. Any unspent funds must be returned.
Allowance: A periodic or lump-sum amount paid to an employee, usually without requiring receipts. Allowances are generally subject to taxation unless they fall under specific exemptions.
What is the definition of an allowance under the CRA Guide T4130?
An allowance (or advance that is non-accountable) is a periodic or lump-sum amount paid to an employee to cover anticipated expenses. It is:
Predetermined without using actual cost.
Usually for a specific purpose.
Used as the employee chooses, as receipts are not required.
What are the general rules for allowances under ITA 6(1)(b)?
Allowances received by an employee for personal or living expenses or for any other purpose must generally be included in employment income unless they meet specific exceptions.
What are some common exceptions under ITA 6(1)(b) where allowances are not included in employment income?
ITA 6(1)(b)(v): Reasonable allowances for travel expenses received while the employee was a salesperson.
ITA 6(1)(b)(viii): Reasonable allowances for travel expenses for employees other than salespersons (excluding motor vehicle expenses).
ITA 6(1)(b)(vii.1): Reasonable allowances for the use of a motor vehicle for employees other than salespersons.
How do allowances affect the ability to claim employment expenses?
If an employee receives an allowance that is not required to be included in income, they may be prevented from claiming certain employment expenses such as:
Salesperson’s expenses (ITA 8(1)(f))
Travel expenses (ITA 8(1)(h))
Motor vehicle travel expenses (ITA 8(1)(h.1))
Motor vehicle capital costs, interest, and capital cost allowance (ITA 8(1)(j))
What determines whether an allowance is taxable or non-taxable?
The inclusion of an allowance in income depends on whether the allowance is considered reasonable or not.
Reasonable allowances are not included in income.
Unreasonable allowances are included in income.
What is the definition of ‘reasonable’ for allowances under ITA rules?
The term “reasonable” is not precisely defined but is based on common sense and the average expected expenses for a given situation.
Reasonableness is determined without regard to actual costs incurred by an employee.
How is reasonableness for motor vehicle allowances defined?
A motor vehicle allowance is considered reasonable if:
It is based solely on the number of kilometers driven for employment duties.
The employee is not reimbursed for the same motor vehicle expenses.
What is the CRA’s position on reasonable per-kilometer allowances?
The CRA considers a per-kilometer allowance reasonable if it does not exceed the prescribed amount:
$0.70 for the first 5,000 km.
$0.64 for each additional km in 2024.
What happens if an employee is reimbursed for expenses in addition to receiving a motor vehicle allowance?
If an employee is both reimbursed and receives an allowance for the same expenses, the allowance is considered unreasonable and must be included in the employee’s income.
What are the prescribed rates for motor vehicle allowances in 2024
For 2024, the prescribed per-kilometer rates are:
$0.70 for the first 5,000 kilometers.
$0.64 for each additional kilometer.
In the territories, the rates are $0.74 for the first 5,000 km and $0.68 for each additional km.
What is the employer’s perspective on allowances?
From the employer’s perspective, paying allowances that must be included in employment income is the simplest solution from a compliance point of view.
It eliminates the need to maintain detailed records of actual expenses, as the responsibility shifts to the employee to claim any deductible expenses.
What is the employee’s perspective on allowances?
For employees, receiving a reasonable non-taxable allowance simplifies the process as they do not need to report it in their income tax return.
However, it is important to keep detailed records in case the CRA challenges the allowance’s tax-exempt status, ensuring it was correctly treated as non-taxable.
What should be considered when determining the tax implications of allowances?
Employers and employees need to carefully consider the structure and amount of allowances to ensure the best income tax consequences.
This includes maintaining records to support the position taken in case of CRA scrutiny.
