Principal Issues:
Whether amounts paid to executive employees to compensate the employer's unilateral decision to reduce their non-taxable benefits program is taxable?
Position:
Any amount paid to employees to replace non-taxable benefits will be taxable as income from employment under section 5 or 6.
Reasons:
As stated in paragraph 10 of the interpretation bulletin IT-337R4-consolid, Retiring Allowances, it is our view that damages, such as those received for lost (unearned) wages or employee benefits, are taxable as employment income if the employee retains his or her employment.
XXXXXXXXXX 2009-032944
I. Landry, M. Fisc.
May 7, 2010
XXXXXXXXXX :
Subject: Tax treatment of amounts paid to compensate the elimination of employments benefits
This is in response to your letter of June 25, 2009 in which you requested an Advance Income Tax Ruling on behalf of XXXXXXXXXX . Since you were not able to provide the information requested, which was essential in processing your Advance Income Tax Ruling request, you asked that we give you a technical interpretation.
More specifically, you requested our comments on the taxation of amounts paid to executive employees to compensate the employer's unilateral decision to reduce their benefits program. In your view, the amounts will be paid as damage arising from a breach of employment contract. You also requested if those payments are tax deductible for the employer as ordinary business expenses.
Unless otherwise stated, all statutory references in this letter are references to the provisions of the Income Tax Act (the "Act").
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
As stated in paragraph 10 of the interpretation bulletin IT-337R4 (consolidated), Retiring Allowances, it is our view that damages, such as those received for lost (unearned) wages or employee benefits, are taxable as employment income if the employee retains his or her employment. Consequently, any amount paid to employees to replace non-taxable benefits will be taxable as income from employment under section 5 or 6.
Subject to the application of section 67 in some circumstances, an amount paid by the employer as employment income will generally be deductible by the employer under section 9.
As stated in paragraph 22 of Information Circular 70-6R5, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Revenue Agency.
We trust that these comments will be of assistance.
Yours truly,
Louise J. Roy, CGA
Manager
for the Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
