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.
November 18, 1992
Carl Sears Business and General
Chief of Audit Division
Sudbury District Office Glen Thornley
(613) 957-2101
Attention: Bob Rennie
Large Case Files
921979
24(1)
This is reply to your memorandum of December 16, 1992 addressed to Legal Services that was referred to us for reply. This matter was referred to us because a Departmental response was considered more appropriate in light of previous decisions taken by Appeals Branch and by Rulings Directorate with respect to similar issues. We also make reference to our telephone conversation (Thornley/Rennie) of July 2, 1992. Your referral and our telephone conversation centred around your view that there is no legal liability at the end of any fiscal year for 24(1) to pay vacation benefits in a fiscal year subsequent to the present year based on vacation earnings in that particular year. Your memorandum sets out your various reasons. We regret the delay in our reply.
Prior to a discussion of the merits of your submission we set out comments relative to our understanding of statements made in
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cases involved in the meaning of "incurred" and "contingent liabilities". In Northern and Central Gas Corporation Limited, [[1985] 1 C.T.C. 192] 1985 DTC 5144, it was held with respect to a reserve claimed by the taxpayer, "The fact that the amount of the liability was ascertainable and that the probability of it not becoming payable was very small (almost infinitesimally small) does not affect the nature of the liability. There was no legal liability on the Plaintiff at the end of 1977 to `refund' the sum to its customers." This was not an accrued vacation pay case, it was not even an accrued expense case but involved the conversion of an inventory gain into an accounts payable for which there only was a contingent liability to pay in the future. In the present case the liability to pay vacation benefits is reasonably ascertainable and the probability exists that such benefits may have to be paid to employees shortly after a particular year-end in the event say, of a lay-off or plant closure or even where an employee resigns or takes retirement. Cited in the Northern and Central Gas Corporation Limited case was the statement, "An expense cannot be said to be incurred by a taxpayer who is under no obligation to pay money to anyone..". This statement is from the decision in the Burnco Industries Ltd. case to which you refer. The decision in that particular case was based on the fact that the backfilling costs would not be incurred until a subsequent year. This is not the same as an employer's legal obligation to pay vacation benefits in the following year based on amounts earned in the current year, generally, on a monthly basis. In the case of the backfilling, the court found that an obligation to do something which might in the future entail the necessity of paying money was not an expense. There was no obligation to pay anyone. If the backfilling was done, expenses would be incurred and, presumably at that time an amount would become ascertainable. In the case of vacation pay the amounts can be estimated with a reasonable amount of accuracy and the recipients are known.
In addition to the foregoing we refer you to our memorandum to the Sudbury District Office (a copy of which is attached) concerning vacation benefits accrued by 24(1). This memo outlines our views on the application of paragraphs 18(1)(a) and 18(1)(e) to accrued vacation pay and may be of interest to you.
As can be seen from the foregoing, we are of the view that employers are not precluded from accruing vacation leave benefits that are earned by employees in the current year but which will not be taken until sometime in the following year or years and which the employer is under a legal obligation to pay. However, this does not entitle the employer to set up at the end of year one, the entire annual leave benefits that a particular employee will be entitled to in year two if part of that benefit is not earned until year two.
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Salaried - Executive
If the company's practice for employees with less than three years, is to grant them vacation benefits of one day per month to a maximum of 10 days (two calendar weeks) we don't see how you can restrict the accrual to amounts covered under the Employment Standard Act. That is, if a particular employee started work on September 1 the accrual in respect of his vacation pay should be allowed as 4 days pay and not as 4% of 4 months wages.
It is not clear from the information provided whether the vacation for a particular year is based on the current year's or the prior year's service. If based on the current year, the accrual at the end of the current year should include nothing in respect of the subsequent year. (This would be the case with a vacation plan similar to that of the federal civil service, where the current year's vacation is advanced to the employee each April 1.) On the other hand, if the vacation for a particular year is based on service in the prior year, it would be appropriate to accrue vacation pay for the particular year at the end of the prior year.
Hourly Employees
We feel that it is unlikely that an hourly paid employee would not take leave or compensatory pay for holidays due in a particular year especially when a vacation schedule is formally made up and posted each year. As vacation pay in a particular year is based on gross earnings in the prior year, an accrual at the end of the prior year appears to us to be appropriate in the circumstances.
Office Unionized Staff
If a union contract requires an employer to award vacation leave on the basis of 2% of the prior year's salary times a number of weeks based on years of service and age, even though the Employment Standard Act requires only a minimum amount based on 4% of earnings, an employee would expect vacation leave based on the higher amount and, in our view, a court would uphold that expectation except in cases where the employee fell within a contractual exclusion. It does not appear to us, in this case, that the circumstances which would disentitle employees from their contractual vacation pay are so widely drafted that we should expect disentitlement to be the norm.
As indicated above, we agree with your statement that there is no legal liability at the end of any particular fiscal year to pay vacation benefits in the subsequent fiscal year based on vacation
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benefits earned in that subsequent year. However, in our view an employer may set up a reserve for vacation benefits earned by employees in the year that are reasonably expected to be taken in the following year. The reserve must not be an estimate but should be set up on an employee by employee basis in accordance with their present salaries and in accordance with their individual daily, weekly or monthly, entitlements.
It appears to us, based on the information supplied by you, that all categories of unionized employees in the present case are paid vacation pay based on the prior year's gross earnings and that this is a quantifiable liability, although not necessarily an immediate liability, of the company at the end of the prior year. It does not appear to us that this is a contingent liability within the meaning of paragraph 18(1)(e).
We trust these comments are of assistance.
E. Wheeler
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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