Principal Issues: [TaxInterpretations translation] On the departure of an employee, can the payment of the annual sick leave balance be considered as a retiring allowance?
Position: No, this payment is employment income.
Reasons: Definition of retiring allowance in subsection 248(1): payment is not made in recognition of long service.
XXXXXXXXXX 2009-030779 Catherine Ayotte, Notary, M.Fisc. April 14, 2009
Dear Madam,
Subject: Retirement allowance and sick leave balance
This is further to your email of January 27, 2009 in which you asked for our opinion on the above subject.
Please note that unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act ("Act").
It appears to us that the situation described in your letter could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a completed transaction, you should provide all relevant facts and documents to the appropriate Tax Services Office for its views. We are, however, prepared to provide the following general comments that may be of assistance to you.
Facts
An employer grants sick leave to its employees annually. The balance of the sick leave is paid in December of each year. If there is a termination of employment during the year, the balance is also paid out upon termination of employment. These payments are made pursuant to contractual obligations arising from the collective agreement.
Your Question
What is the tax treatment of the payment of unused annual sick leave in the situation where the employee resigns, retires or the employer terminates employment? In particular, you wish to know whether the payment of such leave qualifies as a retiring allowance as defined in subsection 248(1).
Our Comments
A retiring allowance is defined in subsection 248(1) of the Act as an amount received by a taxpayer on or after retirement of the taxpayer from an office or employment by a taxpayer either in recognition of the taxpayer’s long service, or in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal.
As stated in Interpretation Bulletin IT-337R4 - Retiring Allowances, jurisprudence1 has already held that a payment for unused sick leave credits may qualify as a retiring allowance where the payment is in recognition of long service.
Generally speaking, the payment of a lump sum to cover the balance of unused sick leave accumulated over the years can be considered a retiring allowance. However, when the payment of the balance of such leave is made annually in accordance with an employment agreement, the Canada Revenue Agency generally considers that this payment is not in recognition of long service when the payment is made upon the employee's departure. In such a case, the amount is usually considered employment income.
For more details on the contents of tax slips, you can refer to Guide RC4120, Employers' Guide, Filing the T4 Slip and Summary available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/rc4120/rc4120-08e.pdf . For more information on how to file a Record of Employment, you can visit the Service Canada website at http://www.servicecanada.gc.ca/eng/ae/employeurs/re_guide.shtml .
We hope that our comments are of assistance.
Best regards,
Ghislain Martineau
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
ENDNOTES
1 Harel v. Deputy Minister of Revenue (Quebec), [1978] 1 S.C.R. 851