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. Can the incentive claimant pay the top-up amount to the covered worker in the form of additional paid vacation time? 2. If the answer to question 1 is “yes”, does the covered worker have to receive the top-up amount in the form of a cash payment for the additional vacation time, or can the covered worker receive it in the form of additional paid vacation time off? 3. Provided that it is permitted, and the covered worker takes the top-up amount in the form of additional paid vacation time off, when does the CRA consider the top-up amount to be paid: (a) in the year additional vacation time was granted to the covered worker, or (b) in the year the covered worker takes the additional paid vacation time off?
Position: 1. Yes; 2. Both payments are possible; 3. (b).
Reasons: Our response is based on a unified textual, contextual and purposive analysis of the legislation.
February 18, 2025
XXXXXXXXXX Nicki Verlinden
2024-104325
Labour Requirements- Additional paid vacation as a “top-up amount”
This letter is in reply to your email dated November 13, 2024, regarding the payment of the top-up amount in subsections 127.46(11) and (12) of the Income Tax Act, given a particular hypothetical fact scenario.
Unless otherwise indicated, all statutory references in this memorandum are to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C., c. 945, as amended, (the “Regulations”).
Hypothetical scenario
All bolded terms are defined in subsection 127.46(1) and are reproduced for convenience in Appendix A.
- - A covered worker performed work at the designated work site of an incentive claimant on the preparation or installation of a specified property.
- - At all relevant times, there was no eligible collective agreement that applied to the covered worker.
- - At all relevant times, the covered worker is an employee of the incentive claimant.
- - At all relevant times, the covered worker was paid an hourly wage for his work on the preparation and installation of the specified property at the designated work site of the incentive claimant.
- - The incentive claimant elected in prescribed form and manner to meet the prevailing wage requirements under subsection 127.46(3) and the apprenticeship requirements under subsection 127.46(5) for each installation taxation year in respect of the specified tax credit.
- - As a consequence of a CRA audit, the incentive claimant received a notification from the CRA in accordance with subsection 127.46(11), stating that the incentive claimant did not meet the prevailing wage requirements for the designated work site for the tax year. The necessary corrective measures are that each covered worker (in this case, only one covered worker) must be paid a top-up amount as determined by subsection 127.46(12).
- - The top-amount is calculated and confirmed by the CRA for the covered worker.
Questions
1. Can the incentive claimant pay the top-up amount to the covered worker in the form of additional paid vacation time?
2. If the answer to question 1 is “yes”, does the covered worker have to receive the top-up amount in the form of a cash payment for the additional vacation time, or can the covered worker receive it in the form of additional paid vacation time off?
3. Provided that it is permitted, and the covered worker takes the top-up amount in the form of additional paid vacation time off, when does the CRA consider the top-up amount to be paid: (a) in the year additional vacation time was granted to the covered worker, or (b) in the year the covered worker takes the additional paid vacation time off?
Relevant Legislation
Subsection 127.46(11) deals with the corrective measures related to not meeting prevailing wage requirements. It states:
Unless subsection (9) applies, if an incentive claimant receives a notification from the Minister specifying that the incentive claimant did not meet the prevailing wage requirements for a designated work site for a taxation year, the incentive claimant may within one year after receipt of the notification, or such longer period as is acceptable to the Minister, cause each covered worker to be paid the top-up amount determined under subsection (12). (Emphasis added).
Subsection 127.46(12) determines the top-up amount for purposes of subsection 127.46(11), as follows:
For each covered worker in respect of an incentive claimant, the top-up amount referred to in subsection (11) for a taxation year shall equal or exceed the amount determined by the formula
A – B + C
where
A is the amount that the covered worker would have received or benefited from, in respect of the worker's employment at the designated work site during the taxation year, had the covered worker been paid in accordance with the prevailing wage requirements in paragraph (3)(a) or subparagraph (3)(b)(i), as applicable;
B is the amount that the worker actually received or benefited from, in respect of the worker's employment at the designated work site during the taxation year; and
C is interest on the difference between the description of A and the description of B, calculated from the beginning of the taxation year to the time of payment at the prescribed rate specified in paragraph 4301(a) of the Income Tax Regulations. (Emphasis added).
The relevant portion of the prevailing wage requirements in subsection 127.46(3) are as follows:
For the purposes of this section, the prevailing wage requirements for an incentive claimant for an installation taxation year are […]
(b) (i) each covered worker at a designated work site of an incentive claimant must be compensated for their work on the preparation or installation of specified property […]
(B) in an amount that is at least equal to the amount of the regular wages (without taking into account overtime) and benefits as specified in the eligible collective agreement that most closely aligns with the covered worker's experience level, tasks and location, calculated on a per hour or similar basis; (Emphasis added)
Other relevant definitions
The word amount is defined in subsection 248(1) of the Act as:
amount means money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing, […] (Emphasis added)
This definition makes it clear that an amount does not necessarily mean money; rather, it can be something else, provided that it can be valued using money.
With respect to the word “paid”, this word is not defined in Act.
In Rosen v. R, the judge stated:
The word “paid” is the past participle of the verb “to pay”. In its ordinary meaning, the verb “to pay” requires that there be a giving or handing over the amount said to be paid. (footnote 1)
The current definition of the word “paid” in the Oxford English online dictionary (“OED”) is as follows:
Paid is the past participle of the verb to pay.
Used in the financial sense, the dictionary states:
transitive. To give, transfer, or hand over (money, or its equivalent) in return for goods or services, or in discharge of an obligation; to deliver (a sum or amount owed).
intransitive. To give money or its equivalent in return for goods, services, etc., or in discharge of a debt or obligation. (Emphasis added).
To be considered paid, something owing or due has to be settled; however, the current version of the OED suggests that the settlement does not have to be made in the form of cash. This is consistent with the definition of “amount”.
Tax Policy
With respect to the Labour Requirements, the Department of Finance has stated the following:
To meet the prevailing wage requirement, a business would need to ensure that all covered workers are compensated at a level that meets or exceeds the relevant wage, plus the substantially similar monetary value of benefits and pension contributions (converted into an hourly wage format), as specified in an "eligible collective agreement". Standard benefits would include health and welfare and vacation benefits. A business could meet the prevailing wage requirement either by paying workers in accordance with an eligible collective agreement, or by paying workers at or above the equivalent prevailing wage. The requirement could be satisfied through different combinations of wages, pension contributions and benefits. (Emphasis added). (footnote 2)
Responses to specific questions
The incentive claimant can pay the top-up amount to the covered worker in the form of additional paid vacation time, provided it occurs within the time period set out in subsection 127.46(11) and is in accordance with the prevailing wages in clause 127.46(3)(b)(i)(B). This conclusion is based on the foregoing definitions and the tax policy.
Given that additional vacation pay is a benefit that can be valued using money, the incentive claimant can pay the top-up amount to the covered worker in cash or by granting him additional paid days off of work (i.e., additional vacation days).
Note that there is a deeming rule in subsection 127.46(14), the relevant portion of which states:
A top-up amount that is paid to a covered worker (a) is deemed to be (i) salary and wages of the worker for the year in which it is received, and (ii) deductible in computing income by the payor for the year in which it is paid; […] (Emphasis added).
Therefore, the incentive claimant will need to consider the applicable payroll taxes that need to be calculated and remitted in regards to the top-up amount paid to the covered worker. The top-up amount will be considered to be paid when the covered worker receives the benefit of the top-up amount (i.e., when he takes the additional vacation days off), and not when the incentive claimant grants the additional vacation pay benefit to the covered worker as the top-up amount.
Lastly, any year-end accrual for the top-up amount made by the incentive claimant in computing its taxable income for a taxation year is not deductible until it is paid to the covered worker, pursuant to subparagraphs 18(1)(t)(i) and 127.46(14)(a)(ii).
We trust these comments will be of assistance.
Yours truly,
Kimberley Wharram
Manager, Resources Section
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
APPENDIX A
DEFINED TERMS USED IN THIS LETTER FROM SUBSECTION 127.46(1)
covered worker means an individual (other than a trust)
(a) who is engaged in the preparation or installation of specified property at a designated work site as an employee of an incentive claimant or of another person or partnership;
(b) whose work or duties in respect of the designated work site are primarily manual or physical in nature; and
(c) who is not
(i) an administrative, clerical or executive employee, or
(ii) a business visitor to Canada as described in section 187 of the Immigration and Refugee Protection Regulations.
designated work site in a taxation year of an incentive claimant means a work site where specified property of an incentive claimant is located during the year and includes the site of a CCUS project (as defined in section 127.44) or of a clean hydrogen project (as defined in section 127.48) of the incentive claimant.
eligible collective agreement means
(a) in Quebec,
(i) a collective agreement negotiated in accordance with applicable provincial law, or
(ii) a prescribed agreement; and
(b) in any other case,
(i) the most recent multi-employer collective bargaining agreement negotiated with a trade union that is an affiliate of Canada's Building Trades Unions for a given trade in a region or province,
(ii) a project labour agreement established with a trade union in accordance with applicable provincial law that covers the work associated with the investments eligible for specified tax credits and that provides for wages and benefits for covered workers in a given trade that are at least equal to the regular wages (without taking into account overtime) and benefits provided for covered workers in an agreement described in subparagraph (i), or
(iii) a prescribed agreement.
incentive claimant means a person that, or a partnership at least one member of which, plans to claim or has claimed a specified tax credit for a taxation year.
installation taxation year, in respect of a specified tax credit, means a taxation year during which preparation or installation of specified property occurs.
specified property means property all or a portion of the cost of which qualifies for a specified tax credit.
specified tax credit means the CCUS tax credit under subsection 127.44(1), the clean technology investment tax credit under subsection 127.45(1) and the clean hydrogen tax credit under subsection 127.48(1).
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Rosin v. R., [1999] 4 C.T.C. 2351, per Bowie, at 2353.
2 Archived - Tax Measures : Supplementary Information | Budget 2023
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