21 August 2000 Internal T.I. 1999-0009157 - Pay Equity - Estates

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Where employees or former employees of the federal government died prior to obtaining a determinable right to pay equity wage adjustment as determined by the Canadian Human Rights Tribunal in 1999:

1. Whether pay equity wage adjustments will be taxable in the hands of former employees or their estates?

2. On what date did the employees obtain a determinable right?

3. Whether interest payable in respect of pay equity wage adjustments will be taxable in the hands of former employees or their estates?

Position:

1. No.

2. November 16, 1999.

3. Yes - in the estates.

Reasons:

1. Neither subsection 70(1) nor (2) applies to the employees.

The wage adjustments are not a source of income to the estates.

This is consistent with the Deceased Persons guide.

2. That was the date on which CHRT issued its Consent Order.

3. Interest is subject to tax by virtue of paragraph 12(1)(c).

August 21, 2000

      Philip Clarke, Manager        Headquarters
      Individual Programs Section   J.D. Brooks
      Client Services Directorate   957-2103

Attention: Rick Owen
1999-000915

Federal Government's Pay Equity Payments in 2000

This is in reply to your request of November 23, 1999 and further to our numerous telephone conversations concerning the taxability of certain amounts which the Federal Government will be paying in the year 2000 to 230,000 of its employees and former employees pursuant to a Decision of the Canadian Human Rights Tribunal ("CHRT").

The Treasury Board Secretariat ("TBS") has been involved in a pay equity dispute with the Public Service Alliance of Canada ("PSAC") which represented six affected collective bargaining groups of federal government employees. The matter was before the Canadian Human Rights Commission ("CHRC") since December 19, 1984, the time PSAC filed its first complaint under s.11 of the Canadian Human Rights Act. In 1990, CHRC referred the matter to a tribunal, the CHRT. In its interim Decision rendered on July 29, 1998, CHRT ordered the payment of pay equity wage adjustments retroactively to March 8, 1985 and the payment of interest (both pre-judgment and post-judgment) on the wage adjustments. Facing complexities in determining the amounts that should be paid, CHRT required TBS and PSAC to mutually determine the actual wage adjustment for each particular level or sub-group within each complainant occupational group. TBS and PSAC reached the mandated agreement on October 29, 1999 and it was presented to CHRT for its approval, which was obtained by way of a Consent Order on November 16, 1999.

Your concern is the taxability of amounts that will be paid to the estates of former employees who died prior to the time at which the wage adjustments became determinable.

We have rephrased your specific questions as follows:

1. If a former employee died prior to the time at which the pay equity wage adjustments became determinable, will the employee's wage adjustment be subject to tax in the hands of the former employee or the former employee's estate (or its beneficiaries)? If so, will it be included in income pursuant to section 3, subsection 5(1) or paragraph 6(1)(a)?

2. What is the date on which the wage adjustments became determinable?

3. Whether or not the wage adjustments will be subject to tax, will the interest be subject to tax?

Your Views

You are aware of the CCRA's general position that one should not report on either a T1 or T3 return retroactive adjustments to employment income where a collective agreement or other authorizing instrument has been signed after the date of an employee's death. You are of the view that neither subsection 70(1) nor (2) of the Income Tax Act is applicable in the case at hand, with the result that the wage adjustments will not be includable in the income of a deceased person. However, you are concerned that the general position regarding retroactive adjustments to employment income that are paid to estates may be merely administrative and thus may not have application to the present situation.

Our Views

Our views, along with supporting explanations, are stated below with respect to each question:

1. It is our view that the wage adjustment will not be taxable in the hands of any employee who died prior to the time at which the wage adjustment became determinable. We have considered the application of subsections 70(1) and (2) of the Income Tax Act since these are the only provisions that could possibly result in the pay equity wage adjustment being included in a deceased person's income. In general terms, subsection 70(1) deems amounts which were payable periodically but not paid before an employee's death to have accrued in equal daily amounts, and the amount so deemed to accrue to the time of death is included in the deceased person's income. Subsection 70(1) does not apply to the pay equity wage adjustments since, at the time of death, these amounts were not payable. As for subsection 70(2), in general terms it concerns rights or things, other than amounts described in subsection 70(1), that are of an income nature and that have not been realized at the date of death. Subsection 70(2) does not apply to the pay equity wage adjustments under consideration since an employee who died prior to obtaining a determinable right to a wage adjustment would not have had a right or thing at the time of death as contemplated by subsection 70(2). With respect to the beneficiaries of estates, subsection 70(3) will not be applicable to tax the beneficiaries on rights or things since subsection 70(3) cannot apply if subsection 70(2) is not otherwise applicable (i.e. other than by virtue of paragraph 70(3)(a)).

It is also our view that the wage adjustment will not be taxable in the hands of the estate (or its beneficiaries) of any employee who died prior to the time at which the wage adjustment became determinable. XXXXXXXXXX.

2. It is our view that the date on which the wage adjustments became determinable was November 16, 1999. We note that, in rendering its interim Decision, CHRT chose to "remain seized of the issue of wage adjustment should (PSAC and TBS be) unable to agree ..." on the distribution of the wage adjustments among the various pay levels. The Agreement between PSAC and TBS was apparently not intended to supplant the Decision but rather was made within the confines of the Decision since the Agreement stated that "the parties further agree to jointly submit the terms of this agreement to the (CHRT) to form the basis of its final order disposing of the complaints." The matter was finally resolved only upon CHRT endorsing the Agreement.

3. The interest will be subject to tax in the hands of the estates (or their beneficiaries) by virtue of paragraph 12(1)(c) of the Income Tax Act, without regard to whether the wage adjustment will be subject to tax. This reflects the CCRA's general view on the taxation of interest which is received pursuant to a settlement or a court order. Administratively, the CCRA will not tax pre-judgment or pre-settlement interest only if it is paid in respect of tort damages for personal injury or death or in respect of damages for wrongful dismissal, or if it is the pre-judgment interest element in retroactive Workers' Compensation awards. Since none of the exceptions is applicable to the wage adjustments, the interest should be taxed as interest.

Should you have any questions, please do not hesitate to contact John Brooks at 957-2103.

T. Murphy
Manager, Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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