Can you gift your vacation to a colleague?
For many Canadians, summertime means summer vacation. And if you're fortunate enough to be employed full-time, then you may indeed find yourself sipping a Moscow Mule by the lake on your employer's dime.
Of course the number of annual "paid" vacation days you get to take is often a function of your seniority, the industry you work in and, in most cases, the biggest determining factor between getting a paltry, bare minimum two weeks vacation or a generous six weeks, is the length of service with your employer.
If you're one of those lucky ones with 25 or 30 vacation days annually, have you ever considered "donating" those days to a fellow employee, assuming your employer permits this?
This was the subject of a recent technical interpretation letter in which the Canada Revenue Agency was asked whether an employee who "donates" vacation time to a co-worker is still subject to tax on the pay received and, conversely, whether the employee who receives those vacation days is considered to be in receipt of a taxable benefit.
In the situation described in the letter, the employer's vacation policy permits its employees to either use their vacation days or convert their vacation leave to cash. Some employees were considering donating a portion of their annual vacation time for use by other employees who have exhausted their own vacation days due to either personal or family hardship.
The CRA responded that its general position is that any payments made for accumulated vacation leave are taxable when they are received. The Tax Act, however, has an "indirect payment" rule which states that even if you don't receive an amount or benefit directly but rather instruct that it be redirected to another person, then that amount is still taxable to you as the intended recipient.
The rule is designed to stop you from simply redirecting income that is rightfully yours to someone else, who may be in a lower tax bracket than you, or, in fact, may be non-taxable altogether.
As a result of this rule, the CRA stated that if an employee directs that her vacation time be transferred to a fellow employee, the indirect payment rule would apply to include the cash equivalent amount in the income of the donor employee. In other words, if you give up your vacation day to a co-worker, you still have to pay tax on your income for that day. The CRA added that no donation tax credit is available.
As for the recipient employee, the CRA concluded that the extra vacation time was not something to which the donee employee was entitled to by virtue of his employment. Rather, it came about as a result of the donor employee, who voluntarily gave up a portion of her vacation leave in order to help the donee and his family. As a result, the recipient employee will be considered by the CRA to have received the extra vacation time as a tax-free gift.