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: When is an advance on account of employment commissions included in income?
What is the tax consequence of a loan to an employee that is eventually written off?
Position: An advance is included in income when advanced.
Section 80.4 could apply on the loan. Subsection 6(15) would apply when loan has been forgiven.
Reasons: Employment commission is taxable when received by an employee. See cancelled IT-222R.
IT-421R discusses the 80.4 aspect of a loan to an employee. Numerous memoranda on file with respect to the application of 6(15) on forgiven loans.
September 25, 1998
Toronto Centre Tax Services Office HEADQUARTERS
Ms Wendy Cooke Jacques E. Grisé
Trust Compliance Technical Advisor 957-2059
981550
XXXXXXXXXX
Mr. Claude Bergevin of the Trust Accounts Division has asked us to advise you with respect to the matter raised by the above-mentioned company in its letter of May 4, 1998 written by XXXXXXXXXX. We apologise for the delay in responding.
XXXXXXXXXX
On the basis of the information provided, we are unable to give a definitive answer on the tax consequence of each account that was written off. However, we will provide you with general information that should be helpful in arriving at a conclusion on the correct tax treatment.
It is important to determine whether the amounts in question are advances on account of future earnings, or loans. The tax consequence varies depending on the nature of the amounts. Whether a particular amount is an advance on account of future earnings or a bona fide loan is a question of fact to be determined after consideration of all the relevant circumstances. The criteria in paragraphs 2 and 3 of cancelled Interpretation Bulletin IT-222R for distinguishing a loan from advances on account of future earnings are still valid. A copy of the cancelled bulletin and its cancelled Special Release of June 9, 1981 are attached for your ease of reference.
The Department continues to maintain that an advance on account of future earnings (including commissions) is to be included in an employee’s income for the year in which that advance is received. An advance on account of future commissions falls within the definition of “remuneration” in subsection 100(1) of the Income Tax Regulations (the Regulations), and withholding is required as determined in accordance with the rules in Part I of the Income Tax Regulations. Subsection 200(1) of the Regulations requires an information return (which includes a T4 slip) in respect of the advance and any other employment income received by an employee from his or her employer. An advance on account of future earnings should be included on the employee’s T4 slip for the year the advance is made. In our view, where an amount is an advance on account of future commissions, there should be no T4 slip issued when all, or a part of, such an advance is written off by the employer.
The ability to increase an individual’s employment income with respect to an advance received in a particular year will depend on whether or not the particular year is statute-barred. A taxation year is considered to be statute-barred after the normal reassessment period. The “normal reassessment period’ is defined in subsection 152(3.1) of the Income Tax Act (the Act). For an individual, the normal reassessment period in respect of a taxation year is the period that ends 3 years after the earlier of the day of mailing of a notice of an original assessment under Part I of the Act in respect of the individual for the year and the day of mailing of an original notification that no tax is payable by the individual for the year.
Where the amounts in question are bona fide loans received in respect of an individual’s employment and all or part of the employee’s obligation in respect of that loan is subsequently settled or extinguished without payment by that employee, subsection 6(15) of the Act deems the employee to have received a benefit from employment which is taxable under paragraph 6(1)(a) of the Act. The value of that benefit is the “forgiven amount” as defined in subsection 80(1) and modified by subsection 6(15.1) of the Act. Furthermore, any benefit arising from interest paid on the loan at less than a prescribed rate should be included in an employee’s income pursuant to section 80.4 of the Act. In this respect, please refer to Interpretation Bulletin IT-421R2.
Section 200 of the Regulations requires an information slip to be prepared in respect of a benefit under paragraph 6(1)(a) of the Act which is deemed to have been enjoyed pursuant to subsection 6(15) of the Act at the time an obligation is settled or extinguished. Please refer to paragraph 6 of Interpretation Bulletin IT-293R for a discussion as to when a debt or obligation is “settled or extinguished”.
Please call Jacques Grisé should you wish to discuss the above.
John F. Oulton
Manager
Business, Property and Employment
Income Section III
Income Tax Rulings and
Interpretations Directorate
Enclosures
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