24 February 1999 Internal T.I. 9904597 - ADVANCES TO EMPLOYEES - IT-222R

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: Is the position in paragraph 9 of cancelled IT-222R still the Department's position? Paragraph 9 of cancelled IT-222R indicates that a payment or overpayment made by mistake to an employee or officer who is not entitled to receive it (i.e., paid in error) is not considered salary or wages of the officer or employee receiving it, nor is it an advance to him or her. Therefore, it is not included in his or her income for the year of receipt. In the event that he or she is required to repay it in the same or another year, no deduction from income is allowable with respect to the repayments made (whether made by deduction from his or her pay or in some other manner).

Position: Yes.

Reasons:

As indicated in the IT Directive, ITD-4, dated September 30, 1997, IT-222R was cancelled since most of the information it contained was no longer relevant to most taxpayers (i.e., it contained information about employee loans made before 1979). The current version of IT-421, Benefits to Individuals, Corporations and Shareholders from Loans or Debt, describes the law concerning employee loans after 1978. Although the position in paragraph 9 of IT-222R regarding payments or overpayments made in error to an employee or officer was not incorporated in another bulletin, it is still the Department's position.

						February 24, 1999

	Source Deductions			HEADQUARTERS
	400 Cumberland, Room 7002	G. Moore
	Attention:  Paul Rémillard	952-1506

						7-990459

Paragraph 9 of IT-222R, Advances to Employees

We are writing in reply to your correspondence of February 22, 1999, in which you asked for our opinion concerning whether the position in paragraph 9 of cancelled IT-222R, concerning overpayments made to an employee or officer in error, is still the Department's position.

Paragraph 9 of the above-mentioned bulletin described a situation that was distinguishable from the rest of the payments mentioned in the bulletin. Where overpayments were made due to calculation errors and such overpayments are required to be repaid, paragraph 9 indicates that the overpayment in these circumstances would not be considered as taxable employment income. You have indicated that in your view, the information in paragraph 9 should still be valid even if IT-222R has been cancelled. You describe a situation in which an employee was inadvertently overpaid $200 in 1998 and is paying it back in 1999. It is your view that the employer should amend the employee's 1998 T4 slip rather than the employee taking a deduction from income in 1999 because he or she repays $200.

Our Comments

As you are aware, subsection 5(1) of the Income Tax Act ("the Act") taxes employees in the year that salary or wages are received. Paragraph 9 of cancelled IT-222R indicates that a payment or overpayment made by mistake to an employee or officer who is not entitled to receive it (i.e., paid in error) is not considered salary or wages of the officer or employee receiving it, nor is it an advance to him or her. Therefore, it is not included in his or her income for the year of receipt. In the event that he or she is required to repay it in the same or another year, no deduction from income is allowable with respect to the repayments made (whether made by deduction from his or her pay or in some other manner).

As indicated in the IT Directive, ITD-4, dated September 30, 1997, IT-222R was cancelled since most of the information it contained was no longer relevant to most taxpayers (i.e., it contained information about employee loans made before 1979). The current version of IT-421, Benefits to Individuals, Corporations and Shareholders from Loans or Debt, describes the law concerning employee loans after 1978. Although the position in paragraph 9 of IT-222R regarding payments or overpayments made in error to an employee or officer was not incorporated in another bulletin, we can assure you that the position was not consciously dropped and remains the Department's position.

We note that in the recent case of The Queen v. John Chopp, 98 DTC 6014 (federal Court of Appeal), and 95 DTC 527 (Tax Court of Canada), a corporation advanced an amount to the shareholder's lawyer as part of the cash required to complete the purchase of a new house for the shareholder. Through a bookkeeping error, the advance was treated in the corporation's books as a general expense rather than as a reduction of the taxpayer's loan account. The Minister increased the corporation's income by the amount of the advance and included this amount in the taxpayer's income as a shareholder's benefit pursuant to subsection 15(1) of the Act. The Court of Appeal found that, for a subsection 15(1) benefit to apply, such a benefit must be conferred with the knowledge or consent of the shareholder or in circumstances where it is reasonable to conclude that the shareholder ought to have known of the benefit. In circumstances when a benefit is conferred without the intent or knowledge of either the shareholder or the corporation, it must be demonstrable that either the shareholder or corporation ought to have known that the benefit was conferred and did nothing to reverse it. The facts in the Chopp case supported a finding that the benefit was conferred in error and without the intent or knowledge of the shareholder or the corporation. The corporation in question was denied a deduction for the amount of the benefit to the shareholder and this action was not contested. Where an honest error is involved, the position in paragraph 9 of cancelled IT-222R regarding employees is comparable to, and supports the result to the shareholder, in the Chopp case.

With respect to the situation you described above, in accordance with the Department's position, we agree with your view that the employer may issue an amended 1998 T4 slip to the employee with respect to the overpayment of $200 made to the employee in error in 1998 and which the employee is repaying in 1999 to the employer. In this case, the employee would not be entitled to deduct the repayment of the $200 to the employer for the 1999 taxation year.

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.

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