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. Is an employee subject to tax on vacation donated to a co-worker? 2. Is an employee in receipt of a taxable benefit when a co-worker donates vacation for his or her use?
Position: 1. Yes. 2. In this case, likely no.
Reasons: See response
April 10, 2014
Re: Employee donation of vacation
We are writing in response to your letter dated November 29, 2013, wherein you requested our comments on the tax implications of an employee foregoing vacation days and donating them to a colleague who has, because of personal or family hardship, exhausted his or her annual vacation and other paid leave.
In the situation described, employees (donors), who are otherwise entitled to convert their vacation leave to cash, are considering donating a portion of their annual vacation or similar paid time off entitlements (hereinafter referred to as vacation) for use by other employees. These other employees (donees) have exhausted their vacation due to personal or family hardship.
Two arrangements are being considered:
1. A one to one arrangement whereby the donor specifies the donee to whom he or she is giving a specified portion of his or her vacation; and
2. A pooled arrangement where the donors' vacation is accumulated in a common pool and an administrative group identifies the needs of donees and advises the employer as to which donees will receive vacation from the pool.
This technical interpretation provides general comments about the provisions of the Income Tax Act (Act) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Tax implications - donors
As stated in paragraph 5 of Interpretation Bulletin IT-334R2, Miscellaneous Receipts, payments made for accumulated vacation leave are taxable under subsection 5(1) of the Act when they are received. An amount or benefit not directly received or enjoyed by a taxpayer may also be included in his or her income under subsection 56(2) of the Act.
Subsection 56(2) of Act requires an amount or benefit not received or enjoyed by a taxpayer to be included in his or her income if all of the following conditions are met:
- there is a payment or transfer of property to a person other than the taxpayer;
- the payment or transfer of property is made pursuant to the direction or with the concurrence of the taxpayer;
- the payment or transfer of property is for the benefit of the taxpayer or for the benefit of another person whom the taxpayer desired to benefit; and
- the payment or transfer of property would have been included in the taxpayer's income if it had been received by the taxpayer.
The amount to be included in the taxpayer's income is the amount that would have been included in the taxpayer's income if the payment or transfer had been made directly to the taxpayer.
Generally, we are of the view that where a donor directs or concurs that his or her vacation be transferred to a donee, subsection 56(2) of the Act will apply to include the vacation amount in the income of the donor to the extent that it would have been if the donor had converted his or her vacation to cash. The amount should be included in the income of the donor in the year the donee takes the vacation. The concurrence or participation of the donor in the conferring of the benefit to a donee may be passive or implicit and can be inferred from all the circumstances of the particular arrangement. This provision is discussed in detail in Interpretation Bulletin IT-335R2, Indirect Payments, dated July 12, 2004, which is available on the CRA website.
It should be noted that the donor will not be entitled to a charitable donation tax credit under section 118.1 of the Act.
Tax implications- donees
As stated in paragraph 4 of IT-334R2, amounts received as gifts (i.e., voluntary transfers of real or personal property without consideration) are not subject to tax in the hands of the recipients. However, when a voluntary payment or other valuable transfer or benefit is received by an employee from an employer, or from some other person, in respect of, in the course of, or by virtue of an office or employment, the amount of the payment or the value of the transfer or benefit is generally included in income under paragraph 6(1)(a) of the Act. Therefore, the value of the vacation received by donees would generally be included in their employment income unless it is received in their personal capacity rather than as an employee.
An amount is generally considered to be received in an individual's personal capacity where the amount is: philanthropic; voluntary; not based on employment factors such as performance, position, or years of service; and not made in exchange for employment services. In our view, the vacation is not something to which the donee was entitled to by virtue of his or her employment; it arose as a consequence of the actions of the donors who voluntarily gave up a portion of their vacation leave in order to help the donee and his or her family. Therefore, the vacation received by a donee would likely be received in his or her personal capacity, or as a gift.
As discussed in paragraph 13 of IT-335R2, while an amount to which subsection 56(2) of the Act applies could be included in the income of both a taxpayer and a person who receives the payment or the property, it is the practice of the Canada Revenue Agency not to assess the same income twice. Accordingly, even if it is determined that paragraph 6(1)(a) of the Act does apply, the amount would not be required to be included in the donee's income as long as it was included in the donor's income under subsection 56(2) of the Act.
We trust that these comments have been of assistance.
Nerill Thomas-Wilkinson, CPA, CA
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate
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