Principal Issues: [TaxInterpretations translation] Can the accumulation of overtime in a time bank be considered as a salary deferral arrangement?
Position: Question of fact. It must be established whether one of the main purposes is to defer tax.
Reasons: Definition of a salary deferral agreement
XXXXXXXXXX 2005-012125
Michel Lambert
April 12, 2005
Dear Sir,
Subject: Accumulated overtime
This is in response to your letter of March 10, 2005 concerning the application of the definition of salary deferral arrangement in subsection 248(1).
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act.
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is our practice not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
You described a situation in which some employees of an employer accumulate overtime in a time bank with the intention of eventually accelerating their retirement or cashing in the hours at retirement. However, most employees use the accumulated time within 12 months of when the hours were accumulated.
You asked whether it is reasonable to conclude that the arrangement described above does not have as its main purpose the deferral of tax payable under the Act and that, consequently, it does not constitute a salary deferral arrangement as defined in subsection 248(1).
For a plan or arrangement to be a salary deferral arrangement within the meaning of subsection 248(1) in respect of a taxpayer for a taxation year, one of the requirements, inter alia, is that a person has a right to receive an amount after the year where it is reasonable to consider that one of the main purposes for the creation or existence of the right is to postpone tax payable under the Act by the taxpayer in respect of an amount that is, or is on account or in lieu of, salary or wages of the taxpayer for services rendered by the taxpayer in the year or a preceding taxation year. Certain exceptions may apply.
Whether a main purpose of the creation or existence of such a right is to defer tax payable under the Act is a question of fact that can only be resolved after considering all the relevant facts. The fact that the period for deferring an amount does not exceed 12 months or that the purpose of the plan or arrangement is to allow an employee to accelerate retirement does not allow us to conclude that a plan or arrangement is not a salary deferral arrangement. If one of the main purposes is to allow an employee to defer tax, the plan or arrangement in respect of that employee could be a salary deferral arrangement.
Employees working for the same employer may have different tax treatment regarding the accumulation of hours in a time bank depending on facts relevant to each employee.
As stated in Information Circular 70-6R5, this opinion is not an advance income tax ruling and is not binding.
Best regards,
Section Manager
for the Director of the Directorate
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch