Dear Sirs:
This is in reply to your letter of December 4, 1990 wherein you requested our guidance on the definition of "salaries and wages" as found in subparagraph 402(3)(a)(ii) of the Income Tax Regulations (the "Regulations"). In particular, you wanted to know if commissions, prizes and incentives, Canadian Pension Plan ("CPP") and Unemployment Insurance ("UI") contributions (employer's and employee's) and Registered Pension Plan ("RPP") and Ontario Health Insurance Plan ("OHIP") payments should be included in "salaries and wages". You also wanted to know if the definition of "salaries and wages" would be affected by the deductions under section 8 of the Income Tax Act (the "Act").
In your letter, you requested a ruling. As stated in paragraph 6 of Information Circular 70-6R2, we do not issue a ruling unless it is in the context of seriously contemplated transactions and not of a hypothetical nature. However, we can provide the following general comments.
In our opinion, the words "salaries and wages" in subparagraph 402(3)(a)(ii) of the Regulations should be read in conjunction with the phrase "paid in the year by the corporation to employees". Therefore, only the salaries and wages paid in the year by the corporation to employees should be included in the calculation. The case law definition of salary includes compensation for services rendered by one to another and this definition includes regular periodic payments as well as irregular payments. "Salaries" and "wages" are defined in subsection 248(1) of the Act under "salary or wages" as income from an office or employment as computed under subdivision a of Division B of Part I of the Act but does not include superannuation or pension benefits or retiring allowances. The employer's portion of the CPP and UI contributions are not income from an office or employment under Part I of the Act, therefore, they will not be included in the formula under subparagraph 402(3)(a)(ii) of the Regulations (the "Formula"). RPP payments are specifically excluded as salaries or wages, therefore, they will also not be included. If the commissions, prizes and incentives are paid in the year by the corporation to employees, then they will be included in the Formula despite their irregularity.
In our opinion, as subparagraph 402(3)(a)(ii) of the Regulations includes only the salaries and wages paid by the corporation to employees, this precludes consideration of the deductions available to an employee under section 8 of the Act. However, any withholdings by the employer, including income tax and the employee's portion of CPP and UI, are considered to be part of the salaries and wages paid by the corporation to employees.
The numerator in the Formula is meant to include the salaries and wages paid to employees in the particular permanent establishment ("PE") and the denominator is meant to include salaries and wages paid to employees of all PE.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of the Information Circular IC70-6R2, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch