Principal Issues: Is a repayment of vacation pay (previously included in employment income) repaid to the employer when the employee terminates his employment early, deductible under paragraph 8(1)(n) of the Act?
Position: Yes
Reasons: The word "period" in paragraph 8(1)(n) of the Act refers to the critical day or days under a contract that the employee must have worked to retain salary/wages. Where an employee is required to repay a prorated amount (the amount of vacation that was not earned), then the period of the contract not worked which gives rise to the partial repayment is the critical period referred to in paragraph 8(1)(n).
April 15, 2011
Sue Leblanc HEADQUARTERS
Senior Program Officer P. Waugh
Policy and Legislative Research Section 905-721-5221
25 McArthur Road
Ottawa ON K1A 0L5
2011-040198Repayment of Vacation Pay
I am writing in response your email dated April 6, 2011, requesting a technical interpretation on whether a repayment of vacation pay (previously included in employment income) repaid to an employer when the employee terminates his employment is deductible under paragraph 8(1)(n) of the Income Tax Act (the "Act"). In the situation you have described, an individual was advanced his vacation credits at the beginning of the year for the period April 1st to March 31st. He took all his vacation prior to his termination on March 2nd. Since the individual did not earn all the vacation credits which were taken at the date of termination, he was required to repay the vacation that was advanced but not earned. The employer did not issue an amended T4.
OUR COMMENTS
In order for a deduction to be permitted under paragraph 8(1)(n) of the Act, three conditions must be met:
1. the amount repaid must be for "a period throughout which the taxpayer did not perform the duties of the office or employment",
2. the amount paid to the taxpayer for the period must have been included in computing the taxpayer's income from an office or employment, and
3. the total of the amounts reimbursed to the employer cannot exceed the total of the amounts received by the taxpayer for the period throughout which the taxpayer did not perform the duties of the office or employment.
One of the requirements to qualify for the deduction under paragraph 8(1)(n) of the Act is that the taxpayer is required to reimburse any amount paid to him for a period throughout which the taxpayer did not perform the duties of the employment. In our view, "the period throughout which the taxpayer did not perform the duties of the office or employment" refers to the critical day or days under a contract that the employee must have worked to retain an employment payment. In a situation where an employee is required to repay salary or wages if he did not work the very last day of the contract or period giving rise to the payment, then that day is the critical "period throughout which" he did not perform the duties of the office or employment which gives rise to the repayment. Where the repayment would be prorated, as the case with vacation repayment, then the period of the contract not worked which gives rise to the partial repayment is the critical period referred to in paragraph 8(1)(n) of the Act.
Since in this situation the individual did not perform the duties of the office or employment for the required time in March, the repayment would relate to a period (March) "throughout which" he did not perform the duties of the office or employment within the meaning of that phrase in paragraph 8(1)(n) of the Act . Therefore, the requirements of paragraph 8(1)(n) would be met and the taxpayer should be permitted to claim a deduction for the repayment (assuming all other conditions are met).
Please let me know if you have any questions.
Yours truly,
Guy Goulet CA, M.Fisc.
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch