Fully or Partially Taxable?: UNREASONABLE ALLOWANCES

In a May 15, 2020 Federal Court of Appeal
case, the Court reviewed whether various
allowances paid to employees of the
taxpayer were subject to CPP and EI. This
required determining whether the
allowances were taxable. The Tax Court of
Canada had previously ruled that some of
the allowances were partially taxable,
while others were either fully taxable or fully
non-taxable. At issue in this case was
whether an allowance could be partially
taxable or whether being in excess of a
“reasonable amount” resulted in the
allowance being entirely taxable.
Taxpayer loses
After reviewing the exclusion of reasonable travel
allowances from income rules, the Court concluded that the
entire allowance is excluded from income if it is
reasonable, or fully included in income if it is
unreasonable. It cannot be partially taxable. As the
allowances in question exceeded a reasonable amount, they
were entirely taxable.

ACTION ITEM: It is extremely important to ensure that
allowances paid are reasonable. If they are determined to
be unreasonable, even if by the thinnest of margins, the
full allowance could go from non-taxable to taxable.
Consult with a specialist to ensure that they are
comfortably reasonable.

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