16 August 1994 External T.I. 9414075 - EMPLOYEES' REMUNERATION - LOAN OR ADVANCE

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Tax treatment of an amount to be advanced to employees due to a change in the pay period hold back of four days to eleven.

Position TAKEN:

Question of Fact. Depending on the circumstances amount could be considered a loan or an advance on account of future earnings. If a loan 80.4 could be applicable, if an advance must be taken into income in year received.

Reasons FOR POSITION TAKEN:

Previous correspondence, Departmental publications, IT-222R and 421R2

   		941407
XXXXXXXXXX	D. Zion

Attention: XXXXXXXXXX

August 16, 1994

Dear Sirs:

Re: Employees' Remuneration

We are writing in response to your letter of May 20, 1994 in which you request an advance ruling regarding a proposed change in the timing of the payment of certain employees' remuneration.

As we understand it,

XXXXXXXXXX

We have enclosed for your information a copy of Information Circular 70-6R2 (IC 70-6R2) and the subsequent special release dated September 30, 1992 which sets out the guidelines under which advance income tax rulings are issued. As discussed in our recent telephone conversation (Zion/XXXXXXXXXX), we cannot confirm the tax consequences of a particular transaction without a thorough review of all relevant facts and documentation pertaining to the transaction. We are therefore not in a position to give you a ruling nor a definitive response. We will however, as agreed, provide the following general comments which may be of assistance to you. In the comments that follow unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the Act).

Our Comments

We are of the view that the payments in question could be considered either an advance or a loan to the employee. Whether a particular payment to an employee from an employer is an advance on account of future salaries or is a genuine loan is a question of fact. We have enclosed Interpretation Bulletin IT-222R, Advances to Employees for your information. Paragraph 2 of this bulletin lists a number of the more usual characteristics the Department will look at to determine whether a particular payment is a true loan for purposes of section 80.4. of the Act.

If it is determined that the payment is a genuine loan, any benefit arising from interest paid thereon at less than a prescribed rate will, subject to subsection 80.4(1.1) of the Act, be included in an employee's income to the extent that it is deemed to be a benefit to the employee under section 80.4 of the Act until such time as the loan principal has been repaid. In this regard, we have also enclosed IT-421R2, Benefits to Individuals, Corporations and Shareholders from Loans or Debt which discusses this benefit in more detail.

Alternatively, where it is determined, after consideration of all the relevant circumstances, that a particular payment to an employee is an advance on account of future salaries, section 80.4 does not apply. The advance is included in the employee's income pursuant to subsection 5(1) of the Act for the year in which it is received, as explained in paragraph 4 of IT-222R.

In summary, the tax treatment of the proposed payments to XXXXXXXXXX employees will depend on whether those payments are determined to be an advance against future salaries or an employee loan.

We trust our comments will be of assistance to you.

Yours truly,

J.A. Szeszycki
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch