2015-0596731I7 Forgiveness of employee debt - amount deemed nil

Principal Issues: Is an amount owed by an employee to an employer included in income if that amount is deemed to be nil under section 155.2 of the Financial Administration Act?

Position: See response

Reasons: See response

Author: Waugh, Phyllis
Section: ITA: 6(15); 6(1)(a); Financial Administration Act: 155.2

XXXXXXXXXX
                                                     2015-059673
                                                      P. Waugh

November 9, 2015

Dear XXXXXXXXXX:

Re:  Amount deemed to be nil under the Financial Administration Act

Note: All references are to the Income Tax Act (Act), unless otherwise noted.

We are writing in response to your request for our assistance in determining the tax implications to your employees from the application of section 155.2 of the Financial Administration Act (FAA). More specifically, you asked whether the application of section 155.2 of the FAA to amounts owing from your employees would result in a taxable benefit to the employees and whether this benefit should be reported on a T4 slip, Statement of Remuneration Paid.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Subsection 155.2(1) of the FAA states that if an amount owing by a person to her Majesty in right of Canada for which the Minister is accountable, does not exceed an amount established by Regulations (set at two dollars under the Low-value Amounts Regulations), that amount is deemed to be nil.  You have stated section 155.2 of the FAA and the supporting regulations apply to all amounts owing to your organization, not just amounts owing from your employees.

Generally, where an employee loan or debt (hereinafter referred to as “loan”) owing to an employer is partially or fully forgiven, the forgiven amount is deemed by subsection 6(15) to be a benefit enjoyed by the employee.  Subsection 6(15) applies where an employee loan is settled or extinguished for an amount less than the outstanding loan.  In our view, when an employee loan is deemed to be nil by the application of section 155.2 of the FAA, that loan has been settled or extinguished and subsection 6(15) will deem a benefit to be enjoyed by the employee.

However, a subsection 6(15) benefit is only included in an employee’s income under paragraph 6(1)(a) if that benefit is received or enjoyed in respect of, in the course of, or by virtue of, the individual’s employment.  Since the benefit is a result of the application of the FAA and not connected to the individual’s employment, it is our view that the benefit is not received or enjoyed in respect of, in the course of, or by virtue of employment.  As such, the forgiven amount is not included in the employee’s income under paragraph 6(1)(a) and is not required to be reported on a T4 slip.

For your information, unless exempted, a copy of this letter will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. A severed copy will also be distributed to the commercial tax publishers, following a 90-day waiting period (unless advised otherwise to extend this waiting period), for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose your identity.

We trust our comments will be of assistance to you.

Yours truly,

Nerill Thomas-Wilkinson, CPA, CA
Manager
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate

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