15 April 2002 External T.I. 2002-0123555 - BANKED VACATION

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Determine tax consequences to employees when they transfer, under their collective agreement, one week of vacation to a reserve fund, to be drawn on prior to retirement.

Position: Question of Fact

Reasons: More information is required on the manner in which the reserve fund will be set up and operated.

XXXXXXXXXX 2002-012355
Wayne Antle, CGA
April 15, 2002

Dear XXXXXXXXXX:

This is in response to your letter of February 7, 2002, in which you requested a ruling on the tax consequences to employees who elect, under a proposed change to their collective agreement, to transfer one week of their annual vacation leave to a reserve fund that could be drawn on prior to their retirement.

As discussed in Information Circular 70-6R4 Advance Income Tax Rulings dated January 29, 2001, we will only consider a ruling request where it is made in respect of a proposed transaction, and it is submitted in the manner set out in this circular. The request for the ruling should contain a complete statement of facts, proposed transactions, and purpose of the proposed transactions, as well as all the supporting documentation. Please refer to IC 70-6R4 for detailed information on the procedures to follow, as well as the fees for this service. However, we will provide you with the following general comments, which are not binding on the Canada Customs and Revenue Agency ("CCRA").

In your letter, you indicate that you are negotiating a working agreement with your employer wherein you propose to include the following clause:

"XXXXXXXXXX."

The tax consequences to the employee will depend upon whether the employer actually contributes the value of the employee's vacation foregone to the reserve fund, and the manner in which the reserve fund is set up and managed. The arrangement might constitute a vacation pay trust, employee benefit plan, or salary deferral arrangement depending on the circumstances. Where there is no trust created, it is likely that the vacation banked would be considered a salary deferral arrangement, unless you can establish that one of the purposes of the arrangement is not the postponement of tax payable with respect to the vacation deferred. If it falls within the definition of salary deferral arrangement, the value of the vacation would be reported in the year in which it was earned.

However, the tax consequences to the employees of such an arrangement can only be conclusively determined after reviewing all of the facts and supporting documentation. Since this is a specific proposed transaction, such a review would only be undertaken in the context of an advance income tax ruling request.

For further information, you may wish to refer to interpretation bulletins IT-389R Vacation Pay Trusts Established under Collective Agreements, IT-502 Employee Benefit Plans and Employee Trusts, and paragraph 12 of IT-529 Flexible Employee Benefit Plans. Please note that the publications referred to in this letter are available on our website at www.ccra-adrc.gc.ca.

We trust that our comments will be of assistance.

Yours truly

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

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