29 October 1999 External T.I. 9926825 - CASHING OUT VACATION LEAVE

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: Tax consequences of employees foregoing vacation leave so that cash equivalent may be given to ill co-worker

Position: Taxable to employees who convert vacation; not taxable to ill employee

Reasons: Payments in respect of vacation constitute employment income, even when benefit is directed to another person as per IT335R; Not taxable to recipient of gift per Savage and Phaneuf cases.

XXXXXXXXXX 	K. Power
		5-992682
Attention:  XXXXXXXXXX 

October 29, 1999

Dear XXXXXXXXXX:

We are writing in response to your letter dated August 27, 1999 concerning the tax consequences of employees foregoing vacation days and donating the cash value to a colleague who is seriously ill.

Our understanding is that a group of employees will each voluntarily give up one day of vacation. The total leave donated would be donated to the ill employee ("Mrs. A"). You are concerned with the tax implications to the contributing employees and Mrs. A.

Our Comments

The situation outlined in your letter relates to specific proposed transactions. It is the practice of this Directorate to comment on such transactions only by way of advance ruling. However, we can provide you with the following general comments.

Payments made in respect of accumulated vacation leave are included in computing employment income and are taxable under subsection 5(1) of the Income Tax Act (the "Act") when they are received, as indicated in paragraph 5 of Interpretation Bulletin IT-334R2 entitled Miscellaneous Receipts. In certain circumstances, amounts paid to another person at the taxpayer's direction are considered to be received by the taxpayer. Subsection 56(2) will cause an amount not received by a taxpayer to be added to the taxpayer's income if the following conditions are met:

a) there is a payment or transfer of property to a person other than the taxpayer;

b) the payment or transfer is pursuant to the direction of or with the concurrence of the taxpayer (this may be implicit);

c) there is a benefit to the taxpayer or a benefit the taxpayer wishes to confer on the other person; and

d) the taxpayer would have been taxable on the amount under some other section of the Act if it had been paid to the taxpayer.

The amount to be included in the taxpayer's income is the amount that would have been included in the taxpayer's income if the payment or transfer had been made directly to the taxpayer. The amount is considered to be income or capital to the taxpayer in the same way it would have been if the taxpayer had received the amount directly. Please refer to Interpretation Bulletin IT-335R entitled Indirect Payments.

In our view, the vacation leave donated by the employees should be included in their income in the same manner as if they had converted their vacation leave to cash for their own use. It will also be subject to withholding for income tax, Canada Pension Plan contributions and Employment Insurance premiums. It should be noted that there is no provision in the Act allowing a deduction or tax credit for amounts donated to an individual.

With regard to the employee receiving the donation, the leading court case on gifts to employees, given on a personal basis rather than by virtue of employment, is Phaneuf Estate v M.N.R. (78 DTC 6001). In that case the major shareholder of a corporation granted the employees of the corporation the right to buy his shares at their par value after the death of his spouse and himself. The court held that the shareholder had made a personal gift to the employees and that the right to buy the shares for less than fair market value did not represent a taxable benefit to the employees. The case of R. v. Poynten (72 DTC 6329) seems to accept the "gift principle" as well. In addition, the Supreme Court of Canada endorsed the gift principle enunciated in Phaneuf Estate in The Queen v. Savage (83 DTC 5409).

In our view, the donation would not constitute income to the recipient Mrs. A because the gift is not something to which she was entitled by virtue of her employment. It arose as a consequence of the actions of co-workers who voluntarily gave up a portion of their vacation leave in order to help her.

We trust that our comments will be of assistance.

Yours truly,

R. Albert, C.A.

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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