12 May 1997 External T.I. 9710655 - RETIREMENT, DEFER VACATION PAY

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:

Can accrued vacation pay due to be paid on retirement be deferred until a subsequent taxation year?

Position:

No

Reasons:

If employee has right to amount and chooses to defer taxation thereof by reason of choosing not to receive it when it is due then we would consider the amount to be constructively received and taxable at that time.

                                        	971065
XXXXXXXXXX		                              M.P. Sarazin

Attention: XXXXXXXXXX

May 12, 1997

Dear Sirs:

Re: Vacation Deferral on Retirement

This is in reply to your letter dated April 23, 1997, wherein you requested our opinion as to whether an employee that is entitled to receive his accrued vacation pay towards the end of 1997 as a result of his retirement could defer the receipt and taxation of the accrued vacation pay until 1998.

Comments

It appears that the interpretation you seek relates to proposed transactions to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996. Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can provide you with the following comments.

The Department is of the view that accrued vacation pay is required to be included in income for the year that is the earlier of the year in which the accrued vacation pay is paid to the employee and the year the employee has constructively received payment thereof. The amount of the accrued vacation pay would be regarded as being constructively received in the taxation year where the employee had a right to receive the amount but chose not to receive it physically until another year. The determination of whether an employee had a right to receive any accrued vacation pay on retirement could only be determined after a review of the appropriate Employment Standards Act and the terms of employment. However, we would note that, under the Employment Standards Act of Ontario, an employer is required to pay out an employee's accrued vacation pay within seven days of the employee's termination of employment and we believe that retirement would result in a termination of employment.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch