25 October 1999 External T.I. 9925045 - WITHHOLDINGS ON VACATION PAY

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 withholdings are required from vacation pay when contributed to RRSP

Position: No, if paid directly to RRSP by employer and vacation pay is $10,000 or less, or employee receives letter of authority from Revenue Canada. CPP & EI still required.

Reasons: Wording of Regulations

XXXXXXXXXX 992504
S. E. Thomson
Attention: XXXXXXXXXX

October 25, 1999

Dear XXXXXXXXXX:

Re: Withholdings on Vacation Pay Transferred to RRSP

This is in reply to your letter of September 16, 1999 in which you ask if withholdings are required on payments of vacation pay when the vacation pay is paid upon termination, and some or all of the vacation pay is transferred to an RRSP.

Vacation pay $10,000 or less. Employer contributes directly to RRSP

Pursuant to subsections 100(3) and (3.2) of the Income Tax Regulations, where an amount of bonus or other retroactive remuneration paid to an employee is $10,000 or less, and the employer contributes some or all of the remuneration directly to an RRSP on behalf of the employee, the employer need not withhold tax on the amount contributed to the RRSP.

Vacation pay is taxable as ordinary income from an office or employment, and is subject to normal payroll deductions under paragraph 153(1)(a) of the Income Tax Act (the "Act"). However, where the above conditions are met, income tax withholdings are not required on the amount contributed to the RRSP, although CPP and EI withholdings are required, if applicable.

Note that amounts contributed to an RRSP on behalf of the employee are subject to the employee's RRSP deduction limit. Contributions in excess of this limit will result in an overcontribution, and may be subject to the penalty tax as set out in Part X.1 of the Act.

We refer you to the T4001 Employers' Guide to Payroll Deductions - Basic Information 1998/1999, in the section entitled "Transfer of Funds". A "bonus or retroactive payment" includes a lump-sum payment of vacation pay. The T4001 guide is available from the Revenue Canada website at http://www.rc.gc.ca/E/pub/tg/40098et/40098e.txt.html.

Vacation pay over $10,000, or paid to employee

Where the remuneration is over $10,000, or where the employee makes an RRSP contribution from an amount received from the employer, the above rules don't apply. However, under subsection 153(1.1) of the Act, an employee may apply to Revenue Canada for a "letter of authority" in advance of the payment of the vacation pay to enable the employer to reduce withholdings on the payment to the employee.

To get a letter of authority, an employee has to write to the Client Services Division of his local tax services office and explain why he wants less tax deducted. The letter of authority will normally take four to six weeks to be processed, although a letter of authority will not be issued in cases where the employee has an outstanding balance or an overdue tax return.

The letter of authority will be returned to the employee to give to the employer. The employer is thereby authorized to reduce withholdings on the vacation pay paid to the employee as indicated in the letter. We refer you to the T4001 Employers' Guide to Payroll Deductions - Basic Information 1998/1999, in the section entitled "Letter of Authority".

We trust we have provided the information you require.

Yours truly,

P. Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate