13 May 1994 External T.I. 9409785 - ACCRUED VACATION/OVERTIME AS RETIRING ALLOWANCE

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.

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:

When and how are amounts under a "banked overtime and vacation" plan taxable.

Position TAKEN:

Taxed as employment income in year paid; if immediate right to payment then likely an SDA; if not deferred compensation and funded, could be RCA or EBP.

Reasons FOR POSITION TAKEN:

If no immediate rights, then ordinary employment income in year paid; if overtime/vacation payable in year and banked, it is deferred compensation; might reconsider whether an SDA in context of advance ruling where employees give up right to immediate payment because employer is in financial difficulty.

											940978
XXXXXXXXXX

Attention: XXXXXXXXXX

May 13, 1994

Dear Sirs:

Re: Banked Time

This is in reply to your letter of April 15, 1994, in which you ask our opinion concerning the tax implications of a hypothetical banked time policy. You describe a situation where an employer in financial difficulty allows employees to bank overtime (worked on statutory holidays or in excess of normal working hours) and vacation. The employees would then receive an amount at any time before or at retirement for the banked time at the rates in effect at the time of payment. Alternatively, the employees could take the time and in effect retire early.

The Department's position on payments in respect of accumulated vacation leave is contained in paragraph 5 of Interpretation Bulletin IT-334R2 ("Miscellaneous Receipts") and paragraph 5 of IT-337R2 ("Retiring Allowances"). We would take a similar view of payments in respect of overtime.

If, however, the employee is entitled in the year to overtime pay or an amount in lieu of vacation leave, the "banking" of these amounts might be a salary deferral arrangement (SDA) as defined in subsection 248(1) of the Income Tax Act (unless as otherwise stated all references to this statute are to the Income Tax Act S.C. 1970-71-72, c. 63 as amended, consolidated to June 10, 1993 - the "Act"). If it is reasonable to consider that one of the main purposes for crediting the employee with the banked overtime or vacation in the year is to postpone the payment of income tax in the year, then the arrangement would be subject to the SDA rules in the Act. The fact that it is the employer and not the employees who initiates the arrangement would not be sufficient to remove it from consideration as an SDA.

If the arrangement is funded, whether through payment to a trustee or by providing security to the employees in the form of a letter of credit, then the proposition that the arrangement is established to assist an employer in financial difficulty is, in our view, refuted. If the banked time is not deferred compensation but rather benefits payable on retirement or some other employment benefit, then a fund or trust which is established to fund those benefits may be a retirement compensation arrangement (RCA) or employee benefit plan (EBP) as those terms are defined in subsection 248(1) of the Act. Please note than in the absence of employer funding, an RCA or EBP cannot exist.

The foregoing comments are an expression of opinion only and are, therefore, not binding on the Department. We would be willing to consider these issues further in the context of an advance ruling request.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate