23 April 2009 Internal T.I. 2008-0297841I7 - Deferred Bonus and 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.

Principal Issues:

1. In which taxation year would an employee have to include in his/her income a bonus that he/she is entitled to receive but requests his/her employer to defer the payment of the bonus until the next taxation year?

2. Would the same rule apply to a retiring allowance?

Position:

1. The bonus will be taxable in the calendar year that the employee was entitled to receive the payment.

2. Yes, unless the employee chooses the instalment option on or before the employment is terminated.

Reasons:

1. Doctrine of "constructive receipt" or SDA rules apply where an employee is legally entitled in a calendar year to receive the payment of the bonus and the employer is obligated to pay it but the payment is deferred to a subsequent calendar year to accommodate the employee.

2. Doctrine of "constructive receipt" applies where the employee has the right to the payment of the retiring allowance in the year and the employer is obligated to pay it but the payment is deferred to accommodate the employee.

									April 23, 2009

     Edmonton Tax Services Office				Head Quarters
     Client Services 						I. Landry, M. Fisc.

     Attention to:  Carol Sayre				2008-029784
          	   Senior Business Services Agent

Deferred Bonus and Retiring Allowance

This is in response to your email of October 23, 2008 wherein you requested our comments regarding the taxation year in which a bonus or a retiring allowance has to be included in an employee's income.

Unless otherwise stated, all statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

You have described a situation where an employee is entitled to a bonus (or a retiring allowance) before the end of the calendar year and he/she requests his/her employer to defer the payment until the next calendar year. The employer agrees to make the payment in January.

Our comments:

Pursuant to subsection 5(1), a taxpayer's income for a taxation year from employment is the salary, wages and other remuneration, including gratuities that they received in the taxation year.

Consequently, the amount of a bonus paid to an employee is generally included in calculating the employee's employment income in the taxation year in which it is received or constructively received by the employee.

As stated in paragraph 10 of Interpretation Bulletin IT-502, Employee Benefit Plans and Employee Trusts, and in our response to Question 13 at the 1984 Revenue Canada Round Table, we consider an amount to have been received by an employee upon the earlier of the date upon which payment is made and the date upon which the employee has constructively received a payment. Constructive receipt is considered to occur in situations where an amount is credited to an employee's debt or account, set apart for the employee, or otherwise available to the employee without being subject to any restriction concerning its use.

Where an employee is legally entitled in a calendar year to receive the payment of the bonus and the employer is obligated to pay it but the payment is deferred to a subsequent calendar year to accommodate the employee, it is our view that the bonus will be considered constructively received and will be taxable in the calendar year that the employee was entitled to receive the payment. To make such a determination, the facts in each particular situation must be reviewed, including the employment agreement.

Where a bonus is not considered constructively received, the employee would be subject to the salary deferral arrangement ("SDA") rules.

A SDA, as defined under subsection 248(1), is a plan or arrangement, whether funded or not, under which a person has a right in a taxation year to receive an amount after the year where it is reasonable to consider that one of the main purposes for the creation or existence of the right is to postpone tax payable under the Act by the taxpayer in respect of an amount that is, or is on account or in lieu of, salary or wages of the taxpayer for services rendered by the taxpayer in the year or a preceding taxation year (including such a right that is subject to one or more conditions unless there is a substantial risk that any one of those conditions will not be satisfied). However, paragraphs (a) through (l) of the definition of an SDA specifically exclude certain plans or arrangements from being considered SDAs.

Where a SDA exists, the deferred amounts and interest earned thereon are, by virtue of subsections 6(11) and 6(12), included in the employee's income for purposes of paragraph 6(1)(a) for the year in which the amounts are deferred or the interest is earned. Any other amount received under a SDA would be included pursuant to paragraph 6(1)(i). Consequently, the employee has the obligation to include the amount that he/she has a right to receive in the taxation year that he/she rendered the services.

Paragraph (k) of the SDA definition in subsection 248(1) is an exception to the SDA rules. This exception refers to a plan or arrangement under which a taxpayer has a right to receive a bonus in respect of services rendered in the taxation year which is to be paid within three years following the end of the year. In our view, this exception would not include a bonus arrangement under which the payment is under the control of the employee.

Pursuant to subparagraph 56(1)(a)(ii), a retiring allowance is required to be included in an employee's income for the year that is the earlier of the year in which the retiring allowance is paid to the employee and the year the employee has constructively received the payment thereof. The determination of whether constructive receipt exists in a specific situation is a question of fact.

It is our view that constructive receipt in a particular year would occur where the employee has the right to the payment of the retiring allowance in the year and the employer is obligated to pay it but the payment is deferred to accommodate the employee.

As stated in paragraph 17 of Interpretation Bulletin IT-337R4, Retiring Allowances, the employees may have the option of receiving an amount either as a lump sum at the time of termination or in instalments over a number of years under programs designed to encourage voluntary retirements. This paragraph also mentions that if the employee chooses the instalment option on or before the employment is terminated, the instalments are taxable in the year received. It is our opinion that the election to choose the instalment option must be made on or before the termination of employment, that is, before an employee is legally entitled to demand payment of the termination amount and the employer is obligated to pay the amount.

It should be noted that the SDA definition would not include a right to receive a retiring allowance since pursuant to that definition the right must arise in respect of an amount that is "salary or wages" which pursuant to the definition of that expression in subsection 248(1) excludes a retiring allowance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the CRA's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (819) 994-2898. The severed copy will be sent to you for delivery to the client.

We trust that these comments will be of assistance.

Yours truly,

Louise J. Roy, CGA
Manager
For Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch