8 December 1986 Income Tax Severed Letter 5-2261 - [Salary Deferral Arrangements]

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.

Revenue Canada Taxation Head Office

W.E. Douglas (613) 957-3496

December 8, 1986

Dear Sirs:

Re: Salary Deferral Arrangements

This is in reply to your letter of August 7, 1986 concerning the following situation.

Your client's employment policy includes additional benefits for long service which is reflected in their vacation policy as follows:

 Length of Service (Years)          Allowance (Weeks)

          1 -  7                            3
          7 - 15                            4 
         15 - 24                            5 
         24 - 30                            6
         30 and over                        7

Senior management employees receive four weeks from one year to fifteen years of service.

With management approval, an employee who by virtue of long service is entitled to vacation in excess of four weeks may bank the excess for use at a future mutually agreeable time or to provide for earlier retirement.

In addition to the above, employees with long service are entitled to further supplementary vacations once every five years as follows:

     after       5 years                 1 week
       "        10 years                 2 weeks
       "        20 years                 2 weeks
       "        25 years                 3 weeks
       "        30 years                 3 weeks
       "        35 years                 4 weeks
       "        40 years                 5 weeks
       "        45 years                 5 weeks

The employees have the option of banking these supplementary entitlements for future use or to provide earlier retirement.

For income tax purposes the client deducts the banked vacations on a "paid basis". When the amount is paid to an employee from his banked vacation balance it is either included in his T4A slip as a retiring allowance or a T4 if the employee has not retired.

Since the above arrangement does not have, as a main purpose, the postponement of tax payable under the Income Tax Act (the "Act"), it is our view that it would not be considered a "salary deferral arrangement" as that term is defined in Bill C-23 which received first reading in the House of Commons on November 7, 1986.

However, we do not concur that the payment of a banked vacation balance to an employee on or after retirement is a "retiring allowance" as defined in subsection 248(1) of the Act. As outlined in paragraphs 4 and 5 of Interpretation Bulletin IT-337R2 , it is our view that such payments constitute employment income under section 5 of the Act.

The above comments are an expression of opinion only and are not binding on the Department. They are, however, our best interpretation of the relevant legislation as it applies generally and we trust that they are of assistance to you.

Yours truly,

for Director General Rulings Directorate Legislative and Intergovernmental Affairs Branch