Principal Issues: [TaxInterpretations translation] How should payroll deductions be calculated when payments are made on account of a salary entitlement?
Position: In this case, the salary entitlement simply represents the salary that the employee was entitled to receive but had not yet received. Payroll deductions must be calculated on the basis that such a payment is payment of remuneration.
Reasons: The Income Tax Act.
XXXXXXXXXX 2009-034469
December 7, 2009
Dear Madam,
Subject: Deductions at source on payment of a salary entitlement
This is in response to your fax of October 16, 2009, in which you requested our opinion on the above subject as described below.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you described a situation where teachers in a school board are paid according to the number of school days worked (194 days). These teachers, instead of receiving their salary over the 194 days, prefer to have their salary spread over the 12 months of the year in 26 instalments. Each instalment is less than the salary entitlement that teachers accumulate over the year.
In your letter, you described the following example:
A teacher has an annual salary of $45,116 and she starts the school year on September 2nd and begins a maternity leave on January 16th of the following year. She has worked 88 days in the school year and has received 10 paychecks since the beginning of the school year.
You accordingly perform the following calculation:
- Wage entitlement: $45,116 / 194 days x 88 = $20,465.28
- Pay received: $45,116 / 26 x 10 pays = $17,352.31
When the employee leaves on maternity leave, you pay the employee $3,112.97.
You are accordingly inquiring as to the nature of the $3,112.97 payment made to the employee in order to determine the applicable rate for deductions at source.
Our Comments
The situation you indicated in your email appears to be related to an actual situation involving specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, it is not management'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 documentation to the appropriate Tax Services Office for its views. We are, however, prepared to provide the following general comments, which we hope you will find helpful.
By virtue of section 101 of the Income Tax Regulations (the "Regulations"), every person who makes a payment referred to in subsection 153(1) of the Act in a taxation year must make payroll deductions as determined by the Regulations.
Section 102 of the Regulations sets out the manner in which source deductions are to be calculated when a person makes a payment of remuneration. A payment of remuneration includes the following payments:
- Salaries or wages;
- Commissions;
- Gratuities that an employee is required to declare to his or her employer under provincial legislation;
- A pension benefit;
- An amount from a retirement compensation arrangement;
- A retiring allowance;
- A death benefit;
- A benefit under a supplementary unemployment benefit plan;
- A payment under a deferred profit-sharing plan;
- A benefit paid under the Employment Insurance Act.
Where such payments are made, you are to calculate the tax to be withheld using one of the following methods:
- the Payroll Deductions Online Calculator (PDOC) method;
- the Tables on Diskette (TOD) method;
- the Payroll Deductions Tables (PDT) method;
- Computer calculation formulas;
- the detailed calculation method.
These methods are fully explained on the Canada Revenue Agency ("CRA") website at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/clcltng/ncmtx/mthd/menu-eng. We also invite you to consult Guide T4001, Employers' Guide - Payroll Deductions and Remittances, for more information in this regard by visiting the CRA website at the following address: http://www.cra-arc.gc.ca/e/pub/tg/t4001/READ-ME.html....
However, certain special rules apply when a person makes one of the payments described below ("special payments"):
-
- Retroactive bonuses and salary increases;
- Salary advances;
- Director's fees;
- Employee profit-sharing plans;
- Overtime compensation;
- Salary Deferral Arrangements;
- Prescribed agreements or plans;
- Retirement Compensation Arrangements;
- Retiring allowances;
- Eligible retroactive lump sum payments;
- Vacation pay and statutory vacations;
- Wages in lieu of notice of termination;
- Wage loss replacement plans;
- Worker's compensation benefits;
In your specific situation, we believe that the payment of an amount to a teacher, representing the teacher’s salary entitlement, represents payment of salary or wages that must be deducted at source in the usual manner. In addition, we do not believe that this payment is one of the special payments noted above.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.