Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: To determine the tax treatment of an arbitration award received as compensation for the loss of opportunity as a result of a breach of rights under a union contract.
Position: The arbitration award is an income receipt to be included in income from other sources as a retiring allowance.
Reasons: Paragraph 8, IT-365R2
2005-013588
XXXXXXXXXX Luisa A. Majerus, CA
(613) 832-3488
September 1, 2005
Dear XXXXXXXXXX:
Re: Damage Payment to Union Member
This is in reply to your email dated June 9, 2005, requesting our views on the tax treatment of the amount you received as compensation for the loss of opportunity as a result of a breach of your rights under your union contract.
Background
You have provided us with copies of the decisions in the Arbitration matter before the Grievance Settlement Board (the "Board") between the XXXXXXXXXX (the "Union") and the XXXXXXXXXX (the "Employer") heard on XXXXXXXXXX. You have also provided us with a copy of the judicial review of these decisions in the XXXXXXXXXX Superior Court of Justice between the Employer and the Board dated XXXXXXXXXX. The result of these decisions was to award certain employees of the Union compensation payments as a result of the "loss of opportunity" during the divesting of certain facilities of the Employer. The Board determined that the Employer had breached its obligations to the Union in not requiring that the new operators recognize the seniority of the Union employees for the purposes of layoffs and job competitions as required by section XXXXXXXXXX of the collective bargaining agreement.
On XXXXXXXXXX you received an arbitration award in the amount of $XXXXXXXXXX, less statutory deductions and an interest payment in the amount of $XXXXXXXXXX. It is your view that the Surrogatum principle described in paragraph 8 of Interpretation Bulletin IT-365R2, "Damages, Settlements and Similar Receipts" ("IT-365R2") should be applied in determining the tax treatment of the arbitration award.
The tax treatment of an amount received as an arbitration award is dependent on the facts in each particular case. An arbitration award may be treated as either an income or a capital receipt.
If it is determined that an arbitration award is an income receipt, such receipt may be included in the calculation of income for tax purposes as income from an office or employment or as income from other sources. Pursuant to subsection 5(1) of the Income Tax Act (the "Act"), a taxpayer's income for a taxation year from an office or employment is the salary, wages and other remuneration received by the taxpayer in the year. Pursuant to subparagraph 56(1)(a)(ii) of the Act, a taxpayer's income for a taxation year from other sources of income includes a retiring allowance. A retiring allowance is defined in subsection 248(1) of the Act to generally mean any amount received "on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service ... or in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal."
If it is determined that an arbitration award is a capital receipt, such receipt may be considered as proceeds of disposition of a capital asset to which the amount relates or as compensation for the loss or sterilization of a capital asset.
There have been several court cases that have looked at the issue of the tax treatment of the receipt of an award. Generally, where there is an employee-employer relationship the award will be considered income from an office or employment such as in the case of Larry L. Vincent v. The Minister of National Revenue (88 DTC 1422, TCC) where the employer wrongfully changed the schedule of employees' days off and the employees filed a grievance pursuant to the collective agreement between the employer and the employees. An arbitrator awarded the employees compensation for working on what would have been a day of rest. Sarchuk, T.C.J. stated that the compensation awarded by the arbitrator did no more than restore the affected employees to the position that he/she would have been in had the wages set out in the collective agreement for working on a day of rest been paid. Sarchuk, T.C.J. then went on to conclude that:
The Award was made for the purpose of satisfying Vincent's [the employee] entitlement to compensation pursuant to the Collective Agreement as it relates to wages to be paid for services rendered on a day of rest and is income within the meaning of section 5 of the Act. The payment he received arose clearly and unequivocally by virtue of the contract of employment and not as a result of some separate agreement or from motivations extraneous to the Collective Agreement.
Where the award is received as a result of the termination of the employee-employer relationship, the courts generally consider the award to be a retiring allowance. In the Tax Court of Canada case of Overin v the Queen (98 DTC 1299, TCC), Judge Rip, J, noted that, "the retiring allowance provision includes income payments flowing from a discrete source of income (i.e. the loss of employment) that is not enumerated in section 3 of the Act". He goes on to say that, "in the absence of paragraph 56(1)(a) the amount in question would be a capital payment. Paragraph 56(1)(a), however, is a specific exception to the general rule". Furthermore, the definition of a retiring allowance includes an amount received in respect of a loss of an office or employment of a taxpayer and the Supreme of Canada has interpreted the phrase "in respect of" in a broad manner:
The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters. Nowegijick v The Queen (83 DTC 5041).
Generally, it is our view that compensation, received for the failure to receive a sum of money that would have been an income item if it had been received, will likely be an income receipt. This position is set out in paragraph 8 of IT-365R2. In addition, where compensation received is no more than a Surrogatum for future profits surrendered, the compensation received is to be treated as a revenue receipt and not a capital receipt.
Accordingly, it is our view that the arbitration award is an income receipt in respect of the loss of an office or employment and should be included in the computation of income from other sources as a retiring allowance.
We trust this information is helpful.
Yours truly,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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