5 November 1997 Internal T.I. 9729246 - advance of future salary to striking 'ees

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 salary advances to striking employees are taxable in year advance received

Position:yes.

Have not investigated whether employer is prohibited from making type of advances being comtemplated

Reasons:

IT-222R

		November 5, 1997

	CPP/EI Eligibility Division	HEADQUARTERS
	Pierre M. Paquette	Sandra Short
(613) 957-2136
	Attention:  Ray Cuthbert
		972924

Advance of Future Salary to Striking Employees

This is in reply to your memorandum of November 4, 1997, concerning the advance of future salary amounts to striking XXXXXXXXXX. You have asked for urgent clarification on the nature of such payments for income tax purposes. The example received by you is:

1997 Negotiated yearly XXXXXXXXXX salary:		$60,000
loss of salary due to strike (8 weeks)		(12,000)

Salary to be received in 1997 (if no advance)		 48,000
Advance on 1998 salary to be paid in 1997:		 12,000 

The question asked is whether the XXXXXXXXXX T4 for 1997 can show $60,000 (actual salary earned and paid plus the amount of the advance of unearned 1998 salary of $12,000) and the 1998 T4 $48,000, reflecting the amount of salary to be paid less instalments on the amount advanced in 1997.

If it is our opinion that the above reporting method is acceptable, the board has asked if an employee, who negotiated a yearly contract of $100,000, commences on July 1, 1997 and receives in 1997 a salary advance from 1998 unearned salary of $25,000, should include $75,000 in income in 1997 and $75,000 in 1998. The concern is that it reflects a form of income leveraging or averaging between the two years.

Our Comments:

Given the urgency of your enquiry, we have not attempted to research applicable provincial statutes in Ontario (XXXXXXXXXX) to determine whether XXXXXXXXXX are authorized to make salary advances or loans to employees when the employees are engaged in either legal or illegal strike activities, political protest actions or walk-outs. We mention this as there may be statutory requirements imposed upon this specific class of employer which may require the employers to redirect or transfer unpaid salary amounts (salaries not required to be paid to XXXXXXXXXX because of their current status) to other persons or which may otherwise limit the type and nature of payments which may be made to employees in certain circumstances. If statutory barriers do exist, we would caution that our comments may be moot. The following comments are very general in nature.

A copy of Interpretation Bulletin IT-222R, entitled "Advances to Employees," should be made available to the client. As discussed in the bulletin, whether a particular payment 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. A loan from an employer to an employee usually has the attributes described in paragraph 2 of the bulletin. An advance on account of future salary is a payment for salary, wages, or commissions that the employee is expected to earn by the performance of future services. Theoretically, the employee is not entitled to further payments until services of a value greater than the amount of the advance has been rendered. However, it is not uncommon for the employer to retain a portion of the amount advanced from a series of subsequent salary amounts until the entire amount advanced has been repaid.

Subsection 5(1) of the Act requires an employee to include in income from an office or employment all salary, wages and other remuneration, including gratuities, received by the taxpayer in the year. Therefore, in the generic example cited above, not only is it acceptable that the employee be taxed on $60,000 in 1997, the Act requires that the employee include $60,000 in income if an advance on 1998 earnings ($12,000) is in fact received by that employee in 1997. The amount of salary to be received in 1998 will be net of the advance made in 1997 and, accordingly, is $48,000. This example assumes that no repayments on the advance are required to be paid in 1997. These comments would apply, with the necessary changes to the dollar amounts, to the second example as well.

Bryan W. Dath
Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch