Principal Issues: [TaxInterpretations translation] Would an employee be able to deduct in computing her income the repayment of $XXXXXXXXXX, which represents the balance owing under a deferred salary leave plan?
Position: Possibly if all the conditions of paragraph 8(1)(n) of the Income Tax Act are satisfied.
Reasons: Paragraph 8(1)(n) of the Act allows an employee to deduct from employment income amounts related to the repayment of salary advances received by the employee during a deferred salary leave.
March 15, 2010
Sherbrooke Tax Services Office Income Tax Rulings Directorate Business and Partnerships Division
Attention: Louise Desmarais. Lucie Allaire, Advocate,
CGA. D. Fisc.2009-035273
Tax treatment of repayment of salary advances under a deferred salary plan
This is in response to your fax of December 18, 2009, which attached a request for a technical interpretation dated October 21, 2009, regarding the application of paragraph 8(1)(n) of the Income Tax Act (the "Act").
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
Specifically, you described a situation where an employee had entered into a contract with her employer establishing a deferred salary leave plan for a period of XXXXXXXXXX years, from XXXXXXXXXX to XXXXXXXXXX. The period of leave under the deferred salary leave plan was from XXXXXXXXXX to XXXXXXXXXX.
Following the leave, you added that on XXXXXXXXXX, the employee began an unpaid leave of absence in order to take another job. At that time, the balance owing on the deferred salary leave plan contract was approximately $XXXXXXXXXXX.
You wish to know if the employee is entitled to a deduction under paragraph 8(1)(n) for the repayment of $XXXXXXXX in 2010, assuming the employee does not intend to return to her first job at the end of the unpaid leave of absence.
You are not asking whether the contract between the employee and her employer meets the conditions of section 6801 of the Income Tax Regulations.
Our Comments
Paragraph 8(1)(n) permits a deduction in computing a taxpayer's income from an office or employment for an amount that the taxpayer is required to reimburse to the employer in respect of an amount paid for a period throughout which the taxpayer did not perform the duties of the office or employment, to the extent that the amount so paid was included in computing the taxpayer's income from an office or employment. In addition, the deduction cannot exceed the total of all amounts received by the taxpayer for the period throughout which the taxpayer did not perform the duties of the office or employment.
On the basis of the facts presented above, it appears that the employee received, throughout the period of her leave, an amount equal to the amount of deferred pay during the deferred salary period preceding her leave, as well as an amount of salary paid in advance. Therefore, based on the information you provided to us, the employee was required to include in her employment income in XXXXXXXXXX, under subsections 6(3) and 5(1), all amounts she received from XXXXXXXXXX to XXXXXXXXXX.
We are of the view that, if the employee reimburses in 2010 the balance owing of $XXXXXXXXXX in respect of the deferred salary leave plan, she could take the deduction under paragraph 8(1)(n) in computing her income for 2010.
Furthermore, the deduction cannot exceed the total of the amounts received by the employee for the period from XXXXXXXXXX to XXXXXXXXXX, which is the period during which the employee was not performing the duties of her employment. In particular, such a deduction would be limited to the amount advanced and paid during the period of deferred salary leave, which had already been included in her income.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.