Canada Revenue Agency
www.cra.gc.ca
Common menu bar links
Income Tax Interpretation Bulletin
Payments by Employer to Employee
NO: IT-196R2
DATE: November 23, 1981
SUBJECT: INCOME TAX ACT
Payments by Employer to Employee
REFERENCE: Subsection 6(3) (also subsection 5(1) and paragraph 6(1)(a))
This bulletin cancels and replaces Interpretation Bulletin IT-196R issued on May 24, 1977. Current revisions are designated by vertical lines.
1. Subsection 6(3) provides, in part, that an amount received pursuant to an agreement made immediately before, during or immediately after the period that the payee was employed by the payer is deemed, for the purposes of section 5, to be remuneration for services rendered during the period of employment unless it can be established that the amount can reasonably be regarded as other than a payment received under the contract of employment or for entering the contract of employment or for a covenant with respect to what the payee is or is not to do before or after his employment terminates.
2. To be considered taxable under subsection 6(3), any amount payable pursuant to a written or oral contract, as described in 1 above, must have the nature and quality of salary, wages, commissions, etc. Neither the method of calculating the amount nor the steps taken to enforce payment under the contract in accordance with its terms (including threatened or successful litigation) alters the applicability of this subsection.
3. On the other hand, that part of a payment in excess of the amount thereof that can reasonably be regarded as having the nature and quality of salary, wages commissions, etc., that is compensation for something else, other than a covenant not to compete, as mentioned in 1 above, may not be taxable under section 5. However, the excess may represent a termination payment to be included in income under subparagraph 56(1)(a)(viii). See IT-365R for the Department's general views on the determination of the tax status of an amount which may be received in respect of a termination of employment, including an amount received for the breach of an employment contract.
4. Following are examples of payments to which subsection 6(3) applies:
(a) A payment received by a person pursuant to a contract of employment which provides that part of his remuneration will be payable on a deferred basis. Such a provision may refer either to a portion of his regular salary, wages, commissions, etc., while he was employed or to some special amount such as an annual bonus. The foregoing remarks do not apply to a payment received that comes within the provisions of section 144, 145 or 147 of the Act.
(b) A payment received by an amateur athlete from a professional club for services to be rendered by him.
(c) A payment received on the termination of employment, where the contract of employment either expressly or implicitly provides that the payee is entitled to receive such payment on account of, in lieu of payment of, or in satisfaction of the employment's obligation to pay his salary, wages, commissions, etc., remaining under the contract of employment or for a period coincident with a reasonable period of notice of the termination of his employment.
5. A taxable payment is included in computing the payee's income in the earliest taxation year in which
(a) he receives it,
(b) absolute enjoyment or use vests in him,
(c) it is paid or transferred pursuant to the payee's direction or with his concurrence to some other person for the benefit of the payee or such other person (subsection 56(2)), or
(d) he is deemed to have received it under the provisions of subsection 78(3).
