Principal Issues: Is an annual bonus and relocation payment (previously included in employment income) repaid to the employer when the employee terminates his employment contract 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 employer must have worked to retain a bonus. Where the employee is required to repay the entire bonus if he did not work the very last day of the contract, 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.
November 16, 2010
Claude Carignan HEADQUARTERS
Employer Compliance Audit Phyllis Waugh
Edmonton TSO 905-721-5221
2010-038580Repayment of Annual Bonus and Relocation Payment
I am writing in response your email dated November 3, 2010, requesting confirmation of whether a relocation payment and annual bonus (previously included in employment income) repaid to an employer when the employee terminates his employment contract early is deductible under paragraph 8(1)(n) of the Income Tax Act (the "Act"). In the situation you have described, individuals may receive a relocation payment or annual bonus from their employer which is included in employment income as salary or wages paid in the year received. The individual signs a contract stipulating that he must remain with the employer for a specified time or the relocation payment/bonus must be repaid to the employer. Depending on the length of time worked, an employee's repayment may be prorated for the number of days worked. You have noted that when the employer issues a letter to the individual confirming a repayment, the Winnipeg TSO has denied a deduction under paragraph 8(1)(n) of the Act on the basis that the amount was not a repayment of salary and wages, using our interpretation letter 2004-0080871 as support.
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/her 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 or specified time period (herein referred to as contract) that the employee must have worked to retain a relocation/bonus payment. In a situation where an employee is required to repay the entire relocation/bonus payment if he did not work the very last day of the contract, 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, 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 on the last day of the contract, the repayment would relate to a period "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 relocation/bonus repayment (assuming all other conditions are met).
Our interpretation letter 2010-0375971 is a change in position and reflects our current position. Therefore, this interpretation letter should be followed and not interpretation letter 2004-0080871.
We trust these comments are helpful.
Guy Goulet, CA, M. Fisc.
for Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Cc: Steve Goggin, Team Leader - ECA, Revenue Collection Division, Edmonton TSO
Shirley Greening, Communications Resource Officer, Individuals & Benefit Services,
Winnipeg TSO
Janine Grace, Technical Advisor, Individual Returns & Compliance Division,
Winnipeg TSO