26 November 1987 Income Tax Severed Letter 5-3589 - [871126]

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.

F.B. Fontaine (613) 957-2140

NOV 26 1987

Dear Sirs:

This is in reply to your letter dated April 15, 1987 addressed to the Toronto District Taxation Office

Following our telephone conversations (Fontaine XXX our understanding of the first situation is as follows:

1. Certain employees of the XXX were on strike in 1986 for 6 months. In order to keep their health benefits in force during that time, the employees paid the appropriate premiums (both the employer's and employee's portions) in full to the XXX

2. During the strike period the employees worked for outside contractors and with the consent of the employees' XXX a flat sum was paid by the contractor to the XXXXXX in respect of each employee.

3. The XXX wishes to transfer the sums paid by the contractors to the employees. Under its Regulations the XXX is unable to make the payment directly to the employees. However, the XXX may pay the money to the XXX which, in turn, would pay it to the employees. T4A's would be ssued to the employees by the XXX in respect of the amounts paid.

4. No part of the sums paid by the contractors to the XXX were included in, or deducted from, the gross wages of the employees. Those sums represented the contractors' cost only and, at the time they were paid to the XXX were not intended as reimbursements for the contributions described in 1 above.

5. Apparently the sums paid by the contractors were not used by the XXX for any additional health care, sickness or insurance coverage for the employees or for any other purpose. Accordingly, the employees requested the to pay the funds to them.

You request our comments as to the income tax implications involved in the particular transaction.

It is our view that the gross amount paid by the XXX to an employee, representing his share of monies transferred to the XXX from the XXX would be considered to be a benefit received by the emp by virtue of (his) employment" with the contractor. Consequently, this amount would be included in computing the employee's income in the year in which it was received pursuant to paragraph 6(1)(a) of the Income Tax Act (the "Act"). This amount would not be affected by the contributions paid by the employees to the XXX

The amount transferred to the XXX by the XXX and paid to the employee, in and by itself, would not be considered to have been received by the XXX for tax purposes.

Our understanding of the second situation is as follows:

1. During the strike period, which is considered to be broken service, the employees did not make contributions to the pension plan, administered by the XXX. It has been determined, however, that this period can be purchased by the employees as credited service. Accordingly, the XXX pension plan wishes to transfer fund to XXX on behalf of those employees who worked during the strike period and made contributions to the XXX pension plan. If the funds are insufficent to purchase the entire period, the difference must be met by the employee

2. Under its regulations XXX may not accept a,-direct transfer of funds from another pension plan. Again, the XXX would be used as a conduit to accept the funds from the XXX pension plan and pay them to XXX T4A's would be issued to the employee by the XXX pension plan in respect of the particular amount attributable to him.

You ask whether the XXX can accept the particular funds and would the Department waive w olding tax by the XXX pension plan.

Since the XXX pension plan cannot make a direct payment to XXX and the XXX is used only as a conduit for the transfer of the funds, it is our view that the funds would be considered to have been paid to the employee by the XXX pension plan. The amount of funds allocated to the employee would be considered a pension benefit and would, therefore, be included in his income pursuant to subparagraph 56(1)(a)(i) of the Act in the year in which the amount was received. The employee may, however claim a deduction in computing his income for amounts paid to a registered pension fund in the year or within 60 days after the end of the year, up to the amount required to be included in his income under subparagraph 56(1)(a)(i).

Since a payment of a "pension benefit" would be considered to have been made 'to the employee, tax would be required to be withheld from such payment by the XXX pension plan pursuant to paragraph 153(1)(b) of the Act and reported on the T4A issued to the employee.

It is our opinion that acceptance of the funds by the XXX behalf of the employees, in and by itself, would not cause funds to be included in computing the income of the XXX

We trust that our comments will be helpful to you.

Yours truly,

ORIGINAL SIGNED BY ORIGINAL SIGNED PAR ROBERT H. JOYCE

for Director Small Business &General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch