3 December 1998 External T.I. 9822185 - MERIT PAYMENTS - UNIVERITY PROFESSORS

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: Is a bonus payment taxable as employment income if added to expense account or to research account?

Position: Taxable as employment income

Reasons: Source of income is employment

XXXXXXXXXX 982218
C. Tremblay
Attention:XXXXXXXXXX

December 3, 1998

Dear Sir;

Re: Merit Payments - University Professors

This is in reply to your letter of August 21, 1998, concerning your request for an interpretation of section 5 of the Income Tax Act (the “Act”), in the situation described.

You describe a situation wherein a collective agreement provides that a professor is eligible to receive merit payments under certain circumstances. Merit payments are, in effect, bonus payments based upon certain criteria and are payable as lump-sums. They are one-time payments that are not added to a professor’s base salary.

By virtue of a letter of understanding between the University and the professors’ union, all professors are entitled to reimbursement for certain professional expenses up to a fixed amount per annum. The letter of understanding provides that reimbursement shall be made for legitimate expenditures related to the performance of a professor’s duties and specifically mentions items such as professional memberships, books, journals, equipment and supplies related to a professor’s teaching or research activities and so on. The University must approve all reimbursement and retains ownership of all capital assets purchased with the funds.

In addition, internal research accounts exist in the name of certain professors. The funds in the research accounts are to be used for research or creative purposes for the benefit of the University community. The funds must be used in accordance with institutional rules and policies. The professor is the signing authority with respect to the research account although the University’s Financial Services Department may refuse to process certain transactions should the University’s rules and policies not be followed.

A professor who is awarded a merit payment has the option of:

i) receiving the payment as income.

ii) having it added to a professional expenses entitlement account.

iii) having it deposited into his or her research account.

You have asked our opinion on whether section 5 of the Act would apply if a professor chooses to receive his or her merit payment in the manner described in option ii) or iii) above.

Our Comments:

The situation outlined in your letter involves an actual fact situation. To the extent that it relates to past transactions you should contact the appropriate tax services office, since the review of such transactions falls within their responsibility. However, we offer the following general comments.

In our view, whether a professor is actually paid the bonus or chooses to have the amount of the merit award treated in the manner set out in (ii) or (iii), the awarded amount is employment income under subsection 5(1) of the Act or a taxable benefit under paragraph 6(1)(a) of the Act.

We caution that our replies are not advance income tax rulings but are merely opinions based solely on the information given.

Yours truly.

J. F. Oulton, C A
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislative Branch

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