14 September 2010 Internal T.I. 2010-0375971I7 - Repayment of signing bonus

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.

Principal Issues: Is a signing bonus (previously included in employment income) repaid to the employer when the employee terminates his employment contract early, deductible under paragraph 8(1)(n) of the Act?

Position: Yes

Reasons: The word "period" in paragraph 8(1)(n) of the Act refers to the critical day or days under a contract that the employer must have worked to retain a signing bonus. Where the employee is required to repay the entire bonus if he did not work the very last day of the contract, then that day is the critical "period throughout which" he did not perform the duties of the office or employment which gives rise to the repayment.

									September 14, 2010

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2010-037597

RE: Repayment of Signing Bonus

I am writing in response your email dated July 22, 2010, requesting a technical interpretation on whether a signing bonus (previously included in employment income) repaid to an employer when the employee terminates his employment contract early is deductible under paragraph 8(1)(n) of the Income Tax Act (the "Act"). In the situation you have described, an individual received a retention signing bonus in 2007 which was included in employment income as salary or wages paid in the year. The contract stipulated that the employee must remain with the company for three years otherwise the signing bonus must be repaid. The individual repaid the entire signing bonus in 2008 when he terminated his employment and the employer supplied a letter to CRA advising of the repayment. The individual deducted the repayment amount at line 232 (Other Deductions) on his 2008 tax return. On audit the deduction was denied on the basis that the amount was not a repayment of salary and wages, using our interpretation letters 2004-0080871 and 9816105 as support. XXXXXXXXXX

OUR COMMENTS

In order for a deduction to be permitted under paragraph 8(1)(n) of the Act, three conditions must be met:

1. the amount repaid must be for "a period throughout which the taxpayer did not perform the duties of the office or employment",

2. the amount paid to the taxpayer for the period must have been included in computing the taxpayer's income from an office or employment, and

3. the total of the amounts reimbursed to the employer cannot exceed the total of the amounts received by the taxpayer for the period throughout which the taxpayer did not perform the duties of the office or employment.

One of the requirements to qualify for the deduction under paragraph 8(1)(n) of the Act is that the taxpayer is required to reimburse any amount paid to him/her for a period throughout which the taxpayer did not perform the duties of the employment. In our view, "the period throughout which the taxpayer did not perform the duties of the office or employment" refers to the critical day or days under a contract that the employee must have worked to retain a signing bonus. In a situation where an employee is required to repay the entire bonus if he did not work the very last day of the contract, then that day is the critical "period throughout which" he did not perform the duties of the office or employment which gives rise to the repayment. Where the repayment would be prorated, then the period of the contract not worked which gives rise to the partial repayment is the critical period referred to in paragraph 8(1)(n) of the Act.

Since in this situation the individual did not perform the duties of the office or employment on the last day of the three year contract, the repayment would relate to a period "throughout which" he did not perform the duties of the office or employment within the meaning of that phrase in paragraph 8(1)(n) of the Act . Therefore, the requirements of paragraph 8(1)(n) would be met and the taxpayer should be permitted to claim a deduction for the repayment (assuming all other conditions are met).

We trust these comments are helpful.

Yours truly,

Randy Hewlett
Manager
for Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch