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:
Whether payment is an advance or loan to employee
Position:
Question of fact.
Reasons:
Go through criteria in IT-222R.
XXXXXXXXXX 971992
Attention: XXXXXXXXXX
September 24, 1997
Re: Advance or Loan to Employee
This is in reply to your letter of July 11, 1997, to Paul Remillard of the Trust Accounts Division. You ask whether certain amounts paid to an employee are to be treated as income subject to withholding tax. The situation is described below.
The employee is paid salary on a current basis. That is, for example, the cheque which is generated on a Wednesday, covers a two week period ending on the Friday and the employee receives the cheque on Friday. The employer decides to switch the pay system so that salary is paid in arrears. The first payment under the new system will be paid on the Friday and will represent salary for a one week period ending on the previous Friday plus an amount representing the net amount the employee would have received under the old system (i.e. net salary for the one week period ending on the Friday the payment is made). This additional amount is paid to reduce the hardship. The additional amount is then repaid by the employee by recovering 20% of the amount from each of the next 5 bi-weekly payments. You ask whether this additional amount is subject to withholdings.
We enclose for your information a copy of Information Circular 70-6R3 which sets out the guidelines under which advance income tax rulings are issued. We cannot confirm the tax consequences of a particular proposed 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 or a definitive response. We will, however, provide the following general comments which may be of assistance to you.
Whether the payment in question could be an advance or a loan to the employee is a question of fact. With respect to loans, paragraph 2 of Interpretation Bulletin IT-222R ("Advances to Employees") lists a number of the more usual characteristics which the Department considers indicative of a loan.
Notwithstanding the comments made in paragraph 2 of IT-222R, it is not necessary in all cases that in order for a payment to be considered a loan it must be a substantial amount and paid for particular purpose or that it bear interest. We have no doubt that in the situation described by you that the employee and employer agree that the additional amount paid on the switch-over will be recovered from the following 5 pays and that the conditions in paragraphs 2(a), (d), (e) and (f) of IT-222R are, therefore, in substance satisfied.
In cases of a bona fide loan, the comments in paragraphs 6 and 8 of IT-222R concerning its tax treatment apply. Furthermore, any benefit arising from interest paid on the loan at less than a prescribed rate will be included in an employee's income under section 80.4 of the Income Tax Act (the "Act") until such time as the loan principal has been repaid. Enclosed is Interpretation Bulletin IT-421R2 ("Benefits to Individuals, Corporations and Shareholders from Loans or Debt") which discusses this benefit in more detail.
Alternatively, where it is determined that a particular payment to an employee is an advance on account of future salary, 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.
Although the foregoing comments are not binding on the Department since they are not made in the context of an advance income tax ruling, we trust they will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
ENCL.
c.c. Mr. J.H. Ivey, Manager
Policy and Technical Services Section
Trust Accounts Division
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