23 October 2000 Internal T.I. 2000-0048907 - COMPENSATION CONDITIONAL ON REPAYMENT

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:

Will a payment of an amount to an employee by an employer constitute "compensation" as that term is defined in subsection 147.1(1) of the Income Tax Act where the employee is required to contribute the amount as a charitable donation.

Position:

No.

Reasons:

A payment that is conditional upon its repayment would not be accepted as a bona fide payment.

		October 23, 2000

HEADQUARTERS HEADQUARTERS
Registered Plans Division W.C. Harding
Robert D'Aurelio, Director (613) 957-8953
Attention: Betty Bertrand
HDL 8208-2-147.1(1)
2000-004890

Meaning of Compensation

This is in reply to your memorandum of September 25, 20000, in which you referred to a letter dated September 23, 2000 sent by your division to XXXXXXXXXX.

In the letter you address a situation in which an employer (that is a registered charity) proposes to increase an employee's income for tax purposes provided the employee makes a charitable donation of an equal amount to the charity. However, in your reply, you noted that before you can address the firm's questions, it will first be necessary for you to determine if a payment of this nature would meet the definition of the term "compensation" as that term is defined in subsection 147.1(1) of the Income Tax Act (the "Act"). Accordingly you have referred the matter to us for our comments.

At the Canadian Tax Foundation 1985 conference the following question and answer was given in respect to the payment of amounts out of an employee benefit plan:

Q.28 Employee Benefit Plans - Capital Beneficiary

What is the Department's view of the following:

1) a plan under which the employee is the capital beneficiary and the employer is the income beneficiary with the employer being obligated to increase capital contributions in subsequent years by the amount of income received in that year?

Department's Position

1) In order to be recognized as an income beneficiary, the employer must have unrestricted right, title, and use of the income allocated to the employer. A payment that is conditional upon its repayment to the trust would not be accepted as a bona fide payment by the trust; therefore it is the Department's position that such income should be taxed in the hands of the trust and not in the hands of the employer.

In our opinion the same principle noted in our reply to this question will apply equally to your situation. A payment of an amount that is conditional upon its repayment to the employer would not be accepted as a bona fide payment by the employer. Accordingly it would not be recognized as either the receipt of compensation by the employee or as a contribution by the employee to the charity.

P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

??