F.B. Fontaine (613) 957-2140
APR 14 1988
Dear Sirs:
Re: Bonus Entitlement and Payment to a Registered Pension Plan
This is in reply to your letter of November 2, 1987. Our understanding of the hypothetical situation that you described is as follows:
1. An employee is a senior executive and a shareholder of a public company (the "employer"). Under an employment contract between the employee and the employer, the employee is entitled to a bonus from the employer based on a percentage of the employer's audited income before taxes. Generally, the bonus will be finalized at least one month after the employer's fiscal year end.
2. The employer establishes a registered pension plan (the "RPP") on the last day of the particular taxation year and makes a payment thereto, on that day, in respect of past services of the employee. The employee agrees, at that time, to reduce his bonus entitlement by the amount of the payment.
3. You have confirmed, during-our telephone conversation (Fontaine XXXX), that:
a) the agreement between the employer and the employee provides that in any event the bonus will not be less than the payment to the RPP;
b) it is expected that the payment will be deductible by the employer in the particular year under paragraph 20(1)(s) of the Income Tax Act (the "Act").
You requested our confirmation as to whether the payment will be included in the employee's income pursuant to subsection 56(2), paragraph 6(1)(a) or any other provision of the Act by virtue of the doctrine of constructive receipt.
In the absence of an examination of the terms and conditions of the employment contract or any agreement between the employer and the employee, we can only indicate in a general way what, in our view, would be the tax consequences to the employee.
As stated in paragraph 5 of Interpretation Bulletin, IT-196R2 , entitled "Payments by Employer to Employee", a taxable amount is included in computing a taxpayer's income in the year in which he receives it or the year in which absolute enjoyment or use of the amount vests in him. In our opinion, the presence of either one of the latter two factors would indicate that the doctrine of constructive receipt would apply in a particular case.
If at a particular time a taxpayer knows that he is entitled to a bonus of a certain minimum amount and agrees at that time that the amount be used for a specific purpose and the amount is so used, it is our view that the taxpayer would be considered to have constructively received the amount by virtue of use of the amount having vested in him at that time. Accordingly, the amount would be included in computing the taxpayer's income from employment for the year in which the amount was constructively received pursuant to subsections 6(3) or 5(1) of the Act.
We do not agree with your interpretation that subsection 56(2) is intended to apply only when a benefit is conferred on a person other than the subject taxpayer. Subsection 56(2) of the Act will apply when a payment or transfer of property has been made "to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person ...".
Based on our understanding of the situation it is our conclusion that:
(a) the employee would be considered to have received remuneration as salary and wages equal to the amount of the payment to the RPP on the last day of the taxation year,
(b) the amount transferred to the RPP would be deductible by the employee in respect of past service contributions within the limitations imposed by paragraph 8(1)(m) of the Act, and
(c) the payment would be deductible by the employer as salary and wages and not as a contribution to the RPP by the employer under paragraph 20(1)(s) of the Act.
We would add that under the proposed legislation on pension reform an employee would not be able to deduct his contributions to a money purchase plan for past services or additional voluntary contributions in respect of current services. Also, we would expect that a pension plan to which no employer's contributions are made would fail to meet the requirements for registration under the Act.
We trust these comments will be helpful to you.
Yours truly,
ORIGINAL SIGNED BY
ROBERT H. JOYCE for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch