2016-0637781I7 Employee loan or debt extinguished or settled

Principal Issues: Is an amount owed by an employee to an employer included in income if that amount is written off under the Financial Administration Act?

Position: See response.

Reasons: See response.

Author: Underhill, Cynthia
Section: ITA: 6(1)(a); 6(15); 6(15.1); 128(2)(a); 248(1); FAA: 23(2.1); 25(1); BIA: 2; 158; Debt Write-off Regulations, 1994; CLPA: 32

XXXXXXXXXX                                                                                                                    2016-063778
                                                                                                                                            C. Underhill
October 12, 2016

Dear XXXXXXXXXX:

Re:  Employee loan or debt extinguished or settled

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

We are writing in response to your request for our assistance in determining the tax implications where an employee loan or debt is extinguished under various circumstances. More specifically, you asked whether subsection 6(15) will deem a benefit to be enjoyed by a current or former employee (hereinafter referred to as “employee”) where the employee loan or debt is extinguished or settled and if the value of that benefit would be included in the employee’s income under paragraph 6(1)(a). In addition, you asked in what year this benefit should be included in the employee’s income.

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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

It is our understanding that your organization may write off or remit an employee loan or debt (hereinafter referred to as “debt”) for the following reasons:

*     financial hardship of the employee;

*     personal bankruptcy of the employee;

*     the organization can no longer take collection action because of the statute-barred limitations under section 32 of the Crown Liability and Proceedings Act (CLPA).

Generally, where an employee debt owing to an employer is partially or fully forgiven by the employer, the forgiven amount is deemed by subsection 6(15) to be a benefit enjoyed by the employee. Subsection 6(15) applies where an employee debt is settled or extinguished for an amount less than the outstanding debt. It is a question of fact as to whether an employee debt has been settled or extinguished, and if subsection 6(15) will deem a benefit to be enjoyed by the employee. In our view, the debt is settled or extinguished where an employer writes off or remits an employee debt.

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 employee’s employment. There must be a connection between the benefit and the employee’s employment.

Remission of debt

You have stated that your organization generally remits an employee debt under subsection 23(2.1) of the Financial Administration Act for reasons of financial hardship. Since the debt is settled or extinguished because of the organization’s decision and not the operation of another law, it is our view that the benefit is connected to the employee’s employment. As such, the debt written off would be included in the employee’s employment income under paragraph 6(1)(a).

Bankruptcy

In our view, where an employee is declared bankrupt and the employee debt is extinguished as a result of the bankruptcy proceedings, the benefit is not connected to the employee’s employment and the amount of the debt extinguished is not included in the employee’s income.

However, where your organization chooses to write off any portion of the debt that may have been recoverable (recoverable debt) in the bankruptcy proceedings, it is our view that the benefit is connected to the employee’s employment. As such, the amount of the recoverable debt written off would be included in the employee’s employment income under paragraph 6(1)(a).

Statute-barred

Although section 32 of the CLPA applies a limitation period of six years to collect an employee debt, the debt is not settled or extinguished by operation of the CLPA. Where your organization writes off a debt because it is not legally enforceable under the CLPA, it is our view that the benefit is connected to the employee’s employment. As such, the amount of the debt written off would be included in the employee’s employment income under paragraph 6(1)(a).

Where subsection 6(15) and paragraph 6(1)(a) apply to include a benefit in the employee’s employment income, the value of the benefit included in income is the amount of the debt that is outstanding immediately before the write off of the debt. Furthermore, the benefit is included in the employee’s employment income under paragraph 6(1)(a) in the year the debt is written off and is required to be reported on a T4 slip, Statement of Remuneration Paid.

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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