10 September 1999 Internal T.I. 9921957 - TAXABLE BENEFITS - COMPUTER PURCHASE PROGRAM

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 consequences of electing to re-assign overtime pay to the College, and allow the College to purchase computer hardware or software, which remains the property of the College.

Position: Amounts are taxable to employees.

Reasons: Payments in respect of overtime constitute employment income, even when benefit is directed to another person pursuant to subsection 56(2) of the Act.

			September 10, 1999

	XXXXXXXXXX	Tax Services Office	HEADQUARTERS
	Appeals Division	Karen Power, CA

Attention:	XXXXXXXXXX
			1999-000387

XXXXXXXXXX Computer Purchase Program

We are writing in reply to your memorandum of August 5, 1999, concerning the tax consequences of employees who have elected to reduce their overtime banks to enable the XXXXXXXXXX (the "College") to purchase computer hardware or software (the "Computer Materials") exclusively for the personal professional use of the employee.

Our understanding of the facts is as follows:

Certain employees of the College work overtime, with payment therefor being deferred.

An employee may elect to be paid for such overtime (upon union approval) and the normal source deductions are made and remitted to Revenue Canada.

Instead of being paid for overtime, the employee can elect with union approval to reduce his or her overtime bank by enabling the College to purchase Computer Materials exclusively for the personal professional use of the employee for the benefit of the College.

Any Computer Materials acquired through this process will belong to the College and not to the employee. The College records these purchases in its inventory and the item is tagged to indicate that it is the property of the College.

The overall arrangement is one in which the employees are giving up (donating) an entitlement to overtime pay in order to assist the College in meeting its mandate through the acquisition of Computer Materials.

Our Comments

Payments made in respect of accumulated vacation leave are included in computing employment income and are taxable under subsection 5(1) of the Income Tax Act (the "Act") when they are received, as indicated in paragraph 5 of Interpretation Bulletin IT-334R2 entitled Miscellaneous Receipts. The Department would take a similar view on payments in respect of overtime.

In certain circumstances, amounts paid to another person at the taxpayer's direction are considered to be received by the taxpayer. Subsection 56(2) will cause an amount not received by a taxpayer to be added to the taxpayer's income if the following conditions are met:

• there is a payment or transfer of property to a person other than the taxpayer;
• the payment or transfer is pursuant to the direction of or with the concurrence of the taxpayer (this may be implicit);
• there is a benefit to the taxpayer or a benefit the taxpayer wishes to confer on the other person; and
• the taxpayer would have been taxable on the amount under some other section of the Act if it had been paid to the taxpayer.

The amount to be included in the taxpayer's income is the amount that would have been included in the taxpayer's income if the payment or transfer had been made directly to the taxpayer. The amount is considered to be income or capital to the taxpayer in the same way it would have been if the taxpayer had received the amount directly. Please refer to Interpretation Bulletin IT-335R entitled Indirect Payments

In our view, the overtime pay provided to the College to purchase Computer Materials should be included in the taxpayer's income under section 5 of the Act in the same manner as if they had converted their overtime bank to cash for their own use. It should also be subject to withholding for income tax, Canada Pension Plan contributions and Employment Insurance premiums.

Since the overtime banks are donated to a Canadian college and since most colleges are registered charities, the taxpayer's may be able to claim a charitable donation credit pursuant to subsection 118.1(3) of the Act. A charitable donation credit will only be available if the taxpayers are considered to have made a gift to the College. However, it's questionable whether a gift has been made as generally a gift is made only if all three of the conditions listed below are satisfied:

• some property - usually cash - is transferred by a donor to a registered charity the transfer is voluntary; and
• the transfer is made without expectation of return. No benefit of any kind may be provided to the donor or to anyone designated by the donor, except where the benefit is of nominal value.

Also, as noted in paragraph 15(f) of IT-11OR3 entitled Gifts and Official Donation Receipts, in the true sense of a gift, the donee must have unfettered right to the use of the gift. However, donations subject to a general direction from the donor that the gift be used in a particular program operated by the charity are acceptable, provided that no benefit accrues to the donor, the directed gift does not benefit any person not dealing at arm's length with the donor, and decisions regarding utilization of the donation within a program rest with the charity.

Finally, based on the information provided to us regarding the computer purchase program, in our view, when the Computer Materials are purchased and provided to the taxpayers for their use, there would be no taxable benefit pursuant to paragraph 6(1)(a) of the Act. No taxable benefit will result as the Computer Materials remain the property of the College.

However, further to our telephone conversation (Power/XXXXXXXXXX) on September 8, 1999, it would appear that some of the provisions of the computer purchase program are not being followed. These lapses may result in the inclusion of taxable benefits under paragraph 6(1)(a) of the Act. We have not been provided with sufficient information to make this determination. One should note that the section 5 income inclusion will remain whether or not the computer purchase program results in a taxable benefit.

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation