Treatment of Income Tax Act Income Exemption in the Determination of Surplus Income: Board and Lodging at Remote or Special Work Sites

January 2008

Issue

What is the position of the Superintendent regarding the appropriate method to calculate surplus income where a bankrupt receives monthly amounts on account of board and lodging from an employer and those payments are not included as income for the purposes of the Income Tax Act?

Background

In some locations in Canada, it is not uncommon for employers to provide board and lodging to employees working at remote or other specified special job sites, or an allowance for procuring board and lodging. Under the provisions of the Income Tax Act (ITA) (s. 5(2), s. 6(6), s. 6(7)), these payments or amounts are not included in the calculation of the income of a taxpayer, subject to certain conditions being met. Where such amounts are excluded from income, they are not pensionable and not insurable, and no Canada Pension Plan (CCP) contributions, Employment Insurance (EI) premiums or income taxes are deducted. For the purposes of this paper, it is assumed that the conditions referred to above have been met.

The need for this position paper became apparent when an employee working in the oil industry in Fort McMurray, Alberta, filed an assignment in bankruptcy and the trustee was obliged to determine whether or not the bankrupt had surplus income pursuant to section 68 of the Bankruptcy and Insolvency Act (BIA). Inclusion of the monthly board and lodging payments resulted in substantial surplus income obligations; doing the calculations without these amounts
left the bankrupt with no surplus income according to the published standards set out in Directive 11R. The Canada Revenue Agency confirmed that the allowance in question was not considered to be income under the ITA.

Applicable sections of the Bankruptcy and Insolvency Act and Directive 11R on Surplus Income

Directives re standard of living factors

68. (1) The Superintendent shall, by directive, establish in respect of the provinces or one or more bankruptcy districts or parts of bankruptcy districts, the standards for determining the portion of the total income of an individual bankrupt that exceeds that which is necessary to enable the bankrupt to maintain a reasonable standard of living.

Interpretation
(2) For the purposes of this section,
(a) "total income" referred to in subsection (1) includes, notwithstanding paragraphs 67(1)(b) and (b.1), all revenues of a bankrupt of whatever nature or source; and
(b) a requirement that a bankrupt pay an amount to the estate of the bankrupt is enforceable against all property of the bankrupt, other than property referred to in paragraphs 67(1)(b) and (b.1).
Trustee to fix amount to be paid
(3) The trustee shall
(a) having regard to the applicable standards established under subsection (1), and to the personal and family situation of the bankrupt, fix the amount that the bankrupt is required to pay to the estate of the bankrupt.
Directive 11R

Par. 6 (2) The family unit's total monthly income shall be determined by subtracting from the total of all of its members' monthly incomes the following amounts, as applicable:

(a) in the case of a salaried employee, minimum statutory remittances (income tax, pension and employment insurance deductions) and other mandatory deductions paid;

or

(b) in the case of a person who is self-employed, business expenses and deductions as permitted by the Income Tax Act or similar provincial legislation, minimum statutory remittances and instalment tax payments.

Analysis

"Total income" for the purposes of the BIA is defined in section 68(2)(a), and includes "all revenues of a bankrupt of whatever nature or source." There being no corresponding definition of  "revenues" in the statute itself, it is helpful to consider relevant case law to provide some clarification. In Re Millin (2005), 2005 CarswellBC 1794, 13 C.B.R. (5th) 91 (B.C.S.C.), it was held that in order to fall within the definition of s. 68(2)(a) of the BIA, the funds in question  must be a substitution for income, akin to income or in the nature of income or must have retained their (previous) character of income.

Par. 6 (2) of the Surplus Income Directive outlines the method for determining "total monthly income," which is based on the "monthly incomes" of the family members. It is also noteworthy that the Directive defers to the Income Tax Act (or similar provincial statutes) for the identification of allowable deductions and certain employment-related expenses. This was a conscious attempt at the time of drafting to ensure some continuity in the interpretation of the two statutes. In the absence of a definition of "income," which is unique to the BIA, it is probably also reasonable to look to the Income Tax Act for direction. And, as previously noted, eligible allowances for board and lodging at remote or special sites are exempted from inclusion as "income" under that Act. The logical conclusion is that if these allowances are not part of a monthly income, they cannot be part of a "total monthly income" for the purposes of calculating surplus income obligations.

There is also a "governing principle" that is worthy of consideration in the case at hand. In Re Maschek, 2007 ABQB 325, 32 C.B.R. (5th) 133, the court considered the interplay between the BIA and the ITA on the issue of locality of the debtor. In his decision, Reg. J.B. Hanebury noted the following in par. 9 of the order:

Both the Income Tax Act and the Bankruptcy and Insolvency Act are federal statutes. As a general principle of statutory interpretation, federal statutes should work harmoniously, one with the other. Dreiger on the Construction of Statutes (3rd d.) 1994, Butterworths: Canada, states at p. 288:

Governing principle. The meaning of words in legislation depends not only on their immediate context but also on the larger context which includes the Act as a whole and the statute book as a whole. The presumptions of coherence and consistency apply not only to Acts dealing with the same subject but also, albeit with lesser force, to the entire body of statute law produced by a legislature. The legislature is presumed to know its own statute book and to draft each new provision with regard to the structures, conventions, and habits of expression as well as the substantive law embodied in existing legislation.

There is an "equitable treatment" argument that also may be made. At some job sites, the employer may provide free board and accommodation directly. In these cases, there is no monetary allowance paid to the employee. If no such facilities exist, or if the number of employees exceeds the spaces available, employees may receive a monthly payment to seek out their own board and lodging. As a matter of parity, workers under either arrangement should be treated the same with respect to determining their incomes for s. 68 purposes. That parity exists under the ITA.

Finally, it is a fundamental purpose of the Act to provide for the financial rehabilitation of insolvent individuals, and permit their return to a productive place in society. In the situation of working debtors at remote or special work sites, the provision of a board and lodging allowance may be the determining factor as to whether the work is a viable choice of employment. It may be that the cost of living in such locations is such that removing or reducing the allowance (by creating surplus income obligations) makes continued employment unattractive or impossible for the bankrupt.  Surely it cannot be the intention of the legislators to discourage in any way the continued employment of such a bankrupt.

For the above reasons, the position of the Office of the Superintendent of Bankruptcy is that for the purposes of the calculation of surplus income, eligible allowances for board and lodging under the Income Tax Act considered as amounts not included as income for tax purposes are likewise not considered as income for the purposes of establishing surplus income under s. 68 of the BIA.

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