22 March 2004 External T.I. 2004-0060641E5 - Unpaid Remuneration

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the administrative position in paragraph 15(a) of IT-109R2 also applies to unpaid remuneration.

Position: No. However, the administrative position outlined in the 1987 Revenue Canada Round Table may apply.

Reasons: The administrative position in paragraph 15(a) of IT-109R2 only applies to unpaid amounts subject to the application of subsection 78(1) of the Act. However, where the employer remits the applicable payroll withholdings, issues a T4 information return and the employee includes the accrued wages in income, it is our administrative position not to apply subsection 78(4).

A. Seidel
XXXXXXXXXX (613) 957-2058
2004-006064
March 22, 2004

Dear XXXXXXXXXX:

Re: Unpaid Remuneration

We are writing in response to your February 4, 2004 e-mail to the Interpretation Bulletins Mailbox. You describe a situation where wages payable to a related person remain outstanding after the 180 days specified in subsection 78(4) of the Income Tax Act (the "Act") but the person to whom the wages are payable has included the amount of the wages receivable in computing their income for income tax purposes. You have requested our comments as to whether subsection 78(4) of the Act would apply to the unpaid remuneration.

The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. To the extent that you require confirmation of the tax consequences of proposed transactions involving this specific type of cable, you should be requesting an advance income tax ruling. However, we would point out that advance income tax rulings are not provided in respect of transactions that are substantially completed. Completed transactions are reviewed by the local tax services office. Although we cannot provide any specific comments with respect to the situation described in your letter, the following general comments may be of assistance.

Subsection 78(4) of the Act applies to accrued but unpaid remuneration. In general terms, payment must be paid within 180 days, regardless of whether the debtor and creditor are dealing at arm's length or non-arm's length, or subsection 78(4) applies to the accrued but unpaid remuneration. At the 1987 Canadian Tax Foundation Revenue Canada Round Table (the "1987 Round Table"), we were asked the following:

"A corporation intends to accrue a year-end bonus and then credit the amount to employees via journal entries within 180 days of the year-end. In this situation, what does the department (now the Canada Revenue Agency) consider as acceptable evidence of payment for purposes of subsection 78(4) (as amended for taxation years commencing after February 25, 1986)?"

Our positions was that "[B]y far the best evidence of payment is that the related payroll withholdings were remitted on time." This position was subsequently expanded to include, as evidence of payment, the issuance of a T4 information return to the employee and the employee reporting the accrued wages as employment income.

It is therefore our view that wages that remain unpaid after the 180 days specified in subsection 78(4) of the Act would be subject to the application of subsection 78(4) of the Act unless the payor has remitted the applicable payroll withholdings, the employer has issued a T4 information return to the employee and the employee has included the amount of the unpaid wages in income for income tax purposes. Where these requirements are not met, subsection 78(4) of the Act will apply to deny the deduction of the accrued wages in the year the wages were accrued. In such circumstances, the wages would be deductible by the taxpayer in the taxation year in which they are actually paid by the taxpayer.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch