27 October 1999 Internal T.I. 9923567 - BANKED VACATION PLAN

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 a banked vacation plan can be considered a pension benefit, rather than vacation leave, and taxed under subsection 78(4).

Position: Not likely.

Reasons: At the time the liability was created, it was for vacation pay that was contractually owing to the employees and not retirement benefits. Even if it could be regarded as a liability for amounts to be paid on retirement, the expense that gave rise to it related to vacation pay.

		October 27, 1999

Large File Case HEADQUARTERS
Hamilton Tax Services Office J. Gibbons
(613) 957-8953
Attention: Vinod Modi
7-992356

XXXXXXXXXX (the "taxpayer")

We are responding to your memorandum of August 23, 1999, in which you requested our views on whether subsection 78(4) of the Income Tax Act would apply to tax the taxpayer's banked vacation plan. The facts are reproduced below.

Facts

• Employees are entitled to vacation leave of 4, 5, or 6 weeks.
• The first two weeks of leave must be taken during the vacation year and must not be taken in periods of less than one week, in compliance with Ontario Employment Standards.
• Under exceptional circumstances, and with the approval of the Division Head, one week of entitlement may be carried into the next vacation year, but must be taken by August 31. Unused vacation leave on August 31 of each year may be "banked," if eligible, or will be forfeited.
• Vacations are not cumulative and cannot, under any circumstances, be taken until earned.
• The taxpayer has a "banked vacation plan" under which employees can bank their unused vacation for the year.
• Under this plan, the employee signs a form in which the employee agrees that the vacation entitlement (time or cash) will not be available until he or she retires or leaves the company for other reasons.
• There are maximums concerning the amount an employee may bank, which are as follows:

	Vacation Entitlement	Maximum Banking Entitlement
	4 weeks	1 week
	5 weeks	2 weeks
	6 weeks	3 weeks

In a letter to you dated August 5, 1999, concerning this issue, we indicated that the taxpayer's vacation plan would likely be considered "reasonable vacation or holiday pay" so that subsection 78(4) would not apply. We stated, however, that the banked vacation plan might be considered a "salary deferral arrangement." In a telephone conversation (Gibbons/Modi), you expressed concern with this view because the existence of a salary deferral arrangement is difficult to prove, since it involves establishing the purpose of a particular arrangement. You believe that a more successful approach in the taxpayer's circumstances would be to apply subsection 78(4) of the Act. In your view, the form and the substance of the taxpayer's liability changes so that it is no longer an accrual for vacation or holiday pay. Rather, you believe that the vacation benefits are transformed into retirement benefits.

At the time the liability was created, it was for vacation pay that was contractually owing to the employees and not retirement benefits. Even if it could be regarded as a liability for amounts to be paid on retirement, the expense that gave rise to it related to vacation pay. Therefore, we see no basis whereby the exception in subsection 78(4) for reasonable vacation or holiday pay would not apply. In our view, it is not uncommon for organizations to allow employees to carry over their vacation to the next period. The only difference in this case is that the taxpayer has a formal arrangement to defer payment for a number of years.

In conclusion, in consultation with our colleagues in the Deferred Income Plans Section, the question that needs to be resolved is whether a "salary deferral arrangement" exists. In our view, the onus is on the taxpayer to show or explain why the postponement of income taxes in respect of salary or wages was not one of the main purposes of the banked vacation plan.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate

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