payroll advance subject to payroll withholdings

In an April 26, 2016 Technical Interpretation (2015-0623571I7, Waugh, Phyliss), CRA opined that where an employer provides a payroll advance to an employee in respect of their future earnings, the amount is not generally considered to be a loan. A salary advance is a payment for salary, wages or commissions that an employee is expected to earn in the performance of future services. These amounts are generally included in the employee’s income under Subsection 5(1) in the year the advance is received.

As long as the individual continues to be employed and perform the services, they are not usually required to repay the salary advance. The fact that the employer is entitled to recover some part of the advance if the employee ceases employment before he/she has provided the requisite services does not change the nature of the payment. If a repayment by the employee is required, a deduction is available in the tax year in which the repayment was made and cannot exceed the advance that was previously included in the employee’s income from employment.

This Technical Interpretation was provided in the context of a one-time transition payment made to employees when transferring between payroll systems (current to payment in arrears). CRA opined that the payment would likely be considered a salary advance and was, therefore, subject to payroll withholdings and taxable to the employee when received.