8 December 1998 External T.I. 9819745 - UNUSED SICK LEAVE CREDITS PAYABLE AS R.A.

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:

1. Whether a payment for unused sick leave credits originating from a supplemental sick leave program could qualify as a retiring allowance. The supplemental sick leave bank is accessible throughout the employee’s career and credits may be exchanged for cash provided an election is made in the prior calendar year.

2. Whether such payment could be used to buy back years of service under a pension plan.

Position:

1. As stated in paragraph 5 of IT-337R3, payments for unused sick leave credits usually qualify as a retiring allowance. If the credits can be traded for cash, however, the SDA provisions might apply and result in an income inclusion in the year they are credited to the employee.

2. A deduction under paragraph 60(j.1) would only be available for the purposes of buying back years of service if the payment of the unused sick leave credits balance could be considered a retiring allowance. However, provided the pension plan allows this, it may be possible to buy back years of service under subsection 147.2(4).

Reasons:

1. SDA rules provide that where, at the end of a taxation year, any person has a right under a salary deferral arrangement in respect of a taxpayer to receive a deferred amount, an amount equal to the deferred amount shall be deemed to have been received by the taxpayer as a benefit in the year.

2. Subsection 147.2 provides the calculation for the maximum deduction for contributions to an RPP, including contributions made to buy back years of service.

XXXXXXXXXX 			5-981974
P. -A. Sarrazin
December 8, 1998

Dear XXXXXXXXXX:

Re: Unused sick leave credits payable as a retiring allowance

This is in reply to your letter of July 29, 1998, in which you sought our comments as to whether a payment for certain unused sick leave credits could qualify as a retiring allowance.

In your letter, you mention that the union you represent is negotiating its next collective agreement which would provide for a payment for additional unused sick leave credits to employees who retire or suffer a loss of office or employment. These sick leave credits (hereinafter referred to as “supplemental sick leave credits”) would be computed in addition to the normal sick leave credits accrued during a member’s career, but could be converted into cash when requested. You ask for our comments on the nature of this arrangement for the purposes of the Income Tax Act (the "Act"). You also wish to find out whether, in case of payment upon retirement or loss of office or employment, the payment could be used to buy back years of service under a registered pension plan (“RPP”).

Our Comments

Since your query is not part of a ruling request, our comments will present our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as mentioned in paragraph 22 of Information Circular 70-6R3, are not binding on the Department.

A payment in recognition of long service of a taxpayer or in respect of loss of an office or employment relating to unused sick leave credits usually qualifies as a retiring allowance for the purposes of the Act. This position is expressed in paragraph 5 of Interpretation Bulletin IT-337R3, a copy of which we understand you already have. If, however, the employee is entitled to an amount in lieu of sick leave because the supplemental sick leave credits can be traded for cash, the “banking” of these amounts might be a salary deferral arrangement (SDA) as defined in subsection 248(1) of the Act. If it is reasonable to consider that one of the main purposes for crediting the employee with the banked sick leave credits is to postpone the payment of income tax in the year, then the arrangement would be subject to the SDA rules in the Act. Those rules provide that where, at the end of a taxation year, any person has a right under a salary deferral arrangement in respect of a taxpayer to receive a “deferred amount”, an amount equal to the deferred amount shall be deemed to have been received by the taxpayer as a benefit in the year.

A deduction under paragraph 60(j.1) would only be available for contributions to or under a RPP if the payment of the supplemental sick leave credits balance could be considered a retiring allowance. If the amounts received in respect of the supplemental sick leave credits are included in an employee’s income as salary or wages, the employee may be entitled to a deduction under another provision of the Act for payments made to buy back years of service under a RPP. Subsection 147.2(4) provides the calculation for the maximum deduction for contributions to a RPP, including contributions made to buy back years of service. For your information, we enclose a copy of IT-167R6 which discusses employee contributions to RPPs.

We trust that these comments will be of assistance.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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