31 August 2001 External T.I. 2001-0089615 - INCOME TAX WITHHOLDING REQ.

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:

Where a summer student is employed for a three-month period, can income tax be withheld as if the salary for that period were the annual salary for the year?

Position:

No. Income tax is required to be withheld on "notional remuneration" for the year, which is based on the maximum number of pay periods possible in a year, where Schedule I of the Regulations provides a range of remuneration for such a pay period.

Reasons:

Subsections 100(1), 102(1) and 106(1) of the Regulations.

XXXXXXXXXX 	2001-008961
		Randy Hewlett, B. Comm.
August 31, 2001

Dear XXXXXXXXXX:

Re: Income Tax Withholding Requirements - Summer Student

We are writing in response to your letter dated June 19, 2001, wherein you requested our opinion on whether an employer that hires a summer student for three months and pays remuneration semi-monthly, must withhold income tax on the basis that the student were paid the semi-monthly amount for an entire year. In your view the employer should withhold on the basis that the student's annual salary is the amount paid for the three-month period. Your letter proposes a hypothetical situation as follows:

	Student's Contractual Period of employment:	3 months
	Number of Pay Periods:	6 semi-monthly periods
	Student's Salary Per Pay Period:	$2,000
	Student's Total Salary:	$12,000
	Student's Total TD1 Claim Amount:	$10,000

You note that Form T4032-ON - Payroll Deductions Tables requires the employer to withhold income tax on the basis that the student earns $48,000 annually ($2,000 x 24 semi-monthly payments). In your view, the remittances exceed the student's tax liability because he or she will only earn $12,000 ($2,000 x 6 semi-monthly payments), thus the employer should only withhold income tax on the basis that this is the annual salary. In support of your view you present two positions:

(a) Primary Position: Since it is known at the commencement of employment that the student will only be employed during part of the year, he or she does not have a pay period referred to in Schedule I of the Income Tax Regulations (the Regulations). As a result, subsection 106(1) of the Regulations applies to the student, by virtue of paragraph (a) thereof.

(b) Alternative Position: If subsection 106(1) of the Regulations does not apply, the phrase "maximum number of pay periods for the year in respect of the appropriate pay period" in paragraph 102(1)(i), and the phrase "maximum number of such pay periods in that year" in paragraph 102(1)(c), both refer to the 6 semi-monthly periods during which the student was actually paid. They do not refer to the 24 semi-monthly pay periods during which the student could be paid in the year.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advanced Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Pursuant to paragraph 153(1)(a) of the Income Tax Act (the Act) an employer is required to withhold income tax on remuneration paid to an employee. Part I and Schedule I of the Regulations contain the prescribed rules related to this withholding provision:

(a) Subsection 100(1) of the Regulations defines a pay period to include, among others, a day, a week, a two-week period and a semi-monthly period.

(b) Paragraph 102(1)(i) of the Regulations requires an employer to withhold for "each such pay period" referred to in subsection 100(1), an amount calculated by dividing the employee's "notional tax for the year by the maximum number of pay periods for the year in respect of the appropriate pay period."

(c) Paragraph 102(1)(e) of the Regulations calculates the employee's "notional tax for the year" based upon the "notional remuneration for the year," as if that amount were the taxable remuneration for the year.

(d) Paragraph 102(1)(c) of the Regulations defines "notional remuneration for the year" as an amount equal to A x B, where:

• A is the remuneration "deemed" paid to the employee in that pay period by taking the mid-point of the applicable range of remuneration established by Schedule I of the Regulations for the pay periods referred to in subsection 100(1) and
• B is the "maximum number of such pay periods in that year" referred to in subsection 100(1).

(a) Where Schedule I of the Regulations does not establish a range of remuneration for a defined pay period, subsection 106(1) provides that the income tax withheld is the amount of tax that may reasonably be expected to be payable under the Act by the employee with respect to the aggregate of all remuneration that may reasonably be expected to be paid by the employer to the employee in respect of that taxation year.

The Regulations do not make an allowance for reduced income tax withholding where the term of employment is less than a year and Schedule I of the Regulations provides a range of remuneration for the periodic payment received by the employee. In such a case, the Regulations provide for a notional calculation of annual remuneration based upon the maximum possible number of such pay periods in a year.

In the hypothetical situation you pose, subparagraph 1(d)(iv) of Schedule I of the Regulations establishes a range of remuneration for the semi-monthly payment between $1,994 to $2020, the mid-point being $2,007. Since Schedule I of the Regulations establishes a range of remuneration for the pay period, subsection 106(1) would not apply. Subsection 102(1) of the Regulations would require income tax to be withheld on the basis that the employee's notional remuneration is the mid-point of the remuneration range multiplied by the maximum number of semi-monthly pay periods in the year: $2,007 x 24, or $48,168.

In cases where the withholding requirements place undue hardship on the employee, an application can be made by the employee under subsection 153(1.1) of the Act to have all or part of the withholding tax waived. The procedure for applying for such a waiver, known as a "letter of authority," is explained in Chapter 4 of the guide T4001 Employers' Guide: Payroll Deductions (Basic Information) 2000-2001. The individual employee must apply for the letter of authority at the Client Services Division of their local Tax Services Office.

We trust our comments will be of assistance to you.

Yours truly,

Terry Young, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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