27 April 1990 Ministerial Correspondence 59514 F - Unpaid Remuneration

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.

We are writing in reply to your letter of January 23, 1990, wherein you requested our opinion regarding the interpretation of subsection 78(4) of the Income Tax Act in the following situations:

1.     An employer wishes to pay unpaid remuneration to an employee corporation while being solvent, is currently unable to make a cash payment to the employee.  Assuming that the employee remits the proper withholdings for income taxes, Canada Pension contributions, and Unemployment Insurance contributions, in lieu of writing a cheque to the employee, the corporation issues a bona-fide promissory note to the employee for the net amount of salary due to the employee.  Does Revenue Canada Taxation agree that the issue of a bona-fide promissory note which the employer will repay over a period of time constitutes payment?  If this note is properly issued before the end of 180 days has the remuneration been paid?

2.     Assuming that the employer writes a cheque for the net amount of salary on the 180th day but the employee is unable to cash the cheque at the bank for 2 or 3 business days, does Revenue Canada Taxation look at the date the cheque is drawn or the date the amount is deposited in the employee's own bank as constituting the date of payment?

Our Comments

A.      With respect to the questions posed in 1, above, the Department takes the view that, unless the note is accepted as absolute payment as discussed in paragraph 2(b) of IT-436R an ordinary promissory note is considered to be a promise to pay and not payment of the remuneration owing.  (See paragraph 12(b) of IT-109R).  In a case where the promissory note is intended by both parties to be payment of the remuneration owing, we agree that the employer (and not the employee as suggested in your letter) would be required to remit the proper withholdings.  Subsection 78(4) would not apply in such a case if the promissory note were received by the employee on or before the 180th day.

B.      The Department's position regarding payments by way of cheque is that the amount of the cheque is income to the taxpayer at the time it is received form a person who is indebted to the taxpayer and certain other conditions are fulfilled.  (See IT-433 under the heading "Receipt of a Cheque").  In our view, similar considerations apply with respect to subsection 78(4). Accordingly, where the employee receives a cheque on the 180th day which would be honoured if presented for payment that day, but chooses to present it 2 or 3 days later, subsection 78(4) would not apply.

We trust our comments will be of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch