Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1. What happens to employers advances to employees, on account of workmans' compensation, when the claim is denied and the employer converts the advances to sick leave.
2. What happens when the loans and advances are not repaid.
Position:
1. The sick leave is employment income in the year it is paid, i.e. when the employer offsets the loans with the net sick pay. The best evidence of the payment of the sick pay is the remittance of the tax withheld from the gross amount of the sick pay.
2. When the loan or advance is not repaid the employee will have a taxable benefit under 6(1)(a), when the debt is settled or extinguished, by virtue of the debt forgiveness rules at 6(15).
Reasons:
1. Ss. 5(1) says a taxpayer's income from employment includes remuneration received in the year.
2. Forgiveness of employee debt rules apply.
July 7, 1999
Revenue Collection Directorate HEADQUARTERS Trust Accounts Division David Shugar 400 Cumberland 957-2133
Attention: Peter Pustay 7-991807
Workers’ Compensation Benefits
This is in reply to your email of June 30, 1999, requesting our reply to the questions raised in your email regarding loans and advances made to employees in respect of Workers’ Compensation Benefits.
Our Comments
1. What happens when advances or loans are not repaid?
Where the amounts in question are bona fide loans received in respect of an individual’s employment and all or part of the employee’s obligation in respect of that loan is subsequently settled or extinguished without payment by that employee, subsection 6(15) of the Income Tax Act (the “Act”) deems the employee to have received a benefit from employment which is taxable under paragraph 6(1)(a) of the Act in the year the amount is settled or extinguished. The value of that benefit is the “forgiven amount” as defined in subsection 80(1) of the Act and modified by subsection 6(15.1) of the Act. Furthermore, any benefit arising from interest paid on the loan at less than a prescribed rate should be included in an employee’s income pursuant to section 80.4 of the Act. In this respect, please refer to Interpretation Bulletin IT-421R2. Section 200 of the Income Tax Regulations requires an information slip to be prepared in respect of a benefit under paragraph 6(1)(a) of the Act which is deemed to have been enjoyed pursuant to subsection 6(15) of the Act at the time an obligation is settled or extinguished. Please refer to paragraph 6 of Interpretation Bulletin IT-293R for a discussion as to when a debt or obligation is “settled or extinguished”.
2. What happens when advances are paid over several years, the claim is denied, and the employer converts the advances to sick leave ?
As stated in our letter to you, dated March 23, 1999, it is our position that a loan or advance in respect of Workers’ Compensation Benefits is not income and there is no requirement to withhold amounts.
In the situation you describe, loans or advances were made over several years in anticipation of future Workers’ Compensation Benefits. The workers’ compensation claim is later denied, and the employer converts the loans or advances to sick leave.
In our view, it may be inappropriate to say the advances are ‘converted’ to sick leave. Use of that term may create the expectation among employers and employees that the conversion of the loan or advance to sick leave is a replacement of one property or debt, for another property or debt of equivalent value, in the nature of a rollover, with no tax consequences.
In our view, the loans or advances are an employee debt and the application of the employee’s accumulated sick leave to offset, or reduce, the balance of loans or advances made to the employee is a payment in satisfaction of the debt. When the sick leave is paid, the employer is required to withhold income tax at that time, under subsection 153(1) of the Act. The best evidence that the employer has paid the sick leave and applied the net pay to offset the loan is that the related payroll withholdings were remitted on time.
Pursuant to subsection 5(1) of the Act, a taxpayer’s income for a taxation year from an office or employment is the salary, wages and other remuneration received by the taxpayer in the year. Therefore, the lump sum sick leave payment must be included in the employee’s income in the year received, regardless of the number of years over which the loans or advances were made. If there is a concern about undue hardship, the employee may apply, under subsection 153(1.1) of the Act, for a reduction of the amount withheld. After applying the sick leave to the debt, any remaining debt would be subject to subsection 6(15) of the Act.
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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