An employee signed a deferred salary leave contract for the period from June 29, 2002, to December 29, 2006, with his leave being taken from May 14 to November 11, 2005. On May 15, 2006, he resigned. The employer withheld his last two pay cheques to reduce the balance remaining on his deferred salary contract, and offered to provide post-dated cheques to pay off the balance.
After finding that the requirements of Reg. 6801(1)(a) were not all satisfied because the leave was not taken at the end of the deferral period, CRA indicated that:
- The payments received by the employee during the leave period likely were advance payments of wages rather than loans given that “there was no note, no acknowledgement of debt and, above all, the fact that the amount received was recovered by reducing the salary paid upon return from leave.”
- Such prepaid salary (i.e., the amounts received while on leave) were required to be included in the employee's income for the year in which it was paid, i.e., the 2005 taxation year.
- However, in the year of resignation, i.e. 2006, since the salary for the last two pay periods was withheld to recover part of the prepaid salary, the amount of salary received by the employee - net of the deductions made by the employer – was to be included in the employee's income for 2006
- In addition, any cheques written by the employee in 2006 for prepaid salary reimbursements would reduce his employment income for 2006 and, if repaid in 2007, would reduce the employee's 2006 employment income, so that the employer would be required to file an amended T4 slip for that taxation year.