| October 11, 1990 | |
| M. Langlios | Business and General |
| Acting Chief of Audit | Division |
| Sudbury District Office | Bill Guglich |
| (613) 957-2102 | |
| G.A. Simpson | |
| Large Case Files | 7-901620 |
SUBJECT: 24(1)
This is in reply to your memorandum of July 18, 1990 concerning the deductibility of accrued vacation leave in respect of salaried employees.
Our understanding of the relevant facts is as follows:
24(1)
24(1)
24(1)
Our Views
We agree with your views. In the Burnco case, the taxpayers upon excavating gravel from a certain gravel pit, became obligated to backfill the area pursuant to an agreement with the local municipality. The court held that an expense within the meaning of paragraph 18(1)(a) of the Act is "an obligation to pay a sum of money. An expense cannot be said to be incurred by a taxpayer who is under no obligation to pay money to anyone ... an obligation to do something which may in the future entail the necessity of paying money is not an expense".
24(1)
Even if the accrued vacation pay is considered an expense incurred paragraph 18(1)(e) prohibits a deduction for a contingent liability. Except for the isolated situations where cash is paid in lieu of vacation leave the payment of vacation pay is contingent on the employee taking his vacation. Under normal circumstances the vacation is lost if it is not taken in the year of entitlement. It is only under unusual or extraordinary circumstances or where management specifically requests, that the vacation may be carried forward to the next year. In the case of Northern and Central Gas Corporation Limited v. Her Majesty, 85 DTC 5144, Madame Justice Reed stated at page 5150: "It was a reserve for a contingent liability. The fact that the amount of the liability was ascertainable and that the probability of it not becoming payable was very small (almost infinitesimally small) does not affect the nature of the liability". Consequently it is our view that even if the accrued vacation pay could be considered an expense incurred it would for purposes of paragraph 18(1)(e) of the Act be a contingent liability.
Finally there is considerable jurisprudence to the effect that even though an amount may be deductible, under GAAP, for accounting purposes it is not necessarily a deductible expense for income tax purposes.
We trust this will be of assistance to you.
for DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch