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:
Whether a payment received from an employee's union is a retiring allowance.
Position: Yes.
Reasons:
The definition of "retiring allowance" in section 248(1) of the Act includes a payment "in respect of" a loss of employment and this includes payments from third parties.
XXXXXXXXXX 2000-003155
A. Seidel
October 25, 2000
Dear Sir:
Re: Retiring Allowance
This is in reply to your letter dated May 25, 2000 in which you requested our views as to whether a payment from a union in settlement of a grievance filed by the union on behalf of its employees is to be included in computing taxable income in the year received.
Confirmation of the tax consequences flowing from completed transactions must be obtained from your local tax services office. The Income Tax Rulings Directorate will provide a technical interpretation concerning the provisions of the Income Tax Act (the "Act") and Income Tax Regulations but not with respect to specific factual or hypothetical transactions. We therefore provide you with the following general comments only.
Your query relates to a situation where an employee's employment is terminated by the employer due to the contracting out of the employee's job. The employee's union files a grievance in respect of the contracting out of bargaining unit work. The union and the former employer agree on a settlement and the union distributes the settlement to the affected employee. You query whether the amount received from the union is to be included in income for tax purposes.
Paragraph (b) of the definition of "retiring allowance" is subsection 248(1) of the Act includes any amount received "in respect of a loss of an office or employment of the taxpayer, whether or not received as, on account or in lieu of payment of, damages". The Supreme Court of Canada, in Gene A. Nowegijick v. Her Majesty the Queen (83 DTC 5041), concluded that the words "in respect of" in a provision of the Act ought to be given the widest possible scope, that the words import such meanings as "in relation to", "with reference to" or "in connection with" and that the words are probably the widest of any expression intended to convey some connection between two related subject matters.
As discussed in paragraphs 5, 6 and 9 of Interpretation Bulletin IT-337R3, a payment will qualify as a retiring allowance if it is received in recognition of long service or in respect of a loss of an office or employment. A payment for a loss of an office or employment usually refers to the elimination or expiration of a particular office or employment. This would include the abolition of a job or position or the loss of an income source for an employee who is released from an office or employment, whether unilaterally or not. A retiring allowance also includes any amount received on account of, or in lieu of, damages.
The case of Hugh Merrins v. Her Majesty the Queen (94 DTC 6669, FC-TD) dealt with the situation where an employee was laid off by his employer, filed a grievance under the relevant collective agreement and the resulting arbitration proceeding culminated in the employee receiving a lump sum payment from the previous employer. The taxpayer argued that the payment was for the disposition of a chose in action and not a retiring allowance.
The case of Phillip Overin v. Her Majesty the Queen, (98 DTC 1299, TCC) dealt with the situation where an employee received a payment from the Province of British Columbia after the company he was working for went into receivership and the employee's employment was terminated without notice of termination and without any severance or other pay. Counsel for the employee argued that a payment will only be considered to be a retiring allowance if there is a direct link between the receipt of the payment and a contract of employment.
In both of the these cases, the Courts concluded that the payment received was a retiring allowance as a result of the connection between the loss of employment and the receipt of the payment.
In Merrins, Pinard, J., in concluding that there was a connection between the payment received and the loss of employment, stated the following:
"Had there been no loss of employment, there would have been no grievance, no settlement, no award and, therefore, no payment of the sum to the plaintiff."
In Overin, Rip, T.C.C.J., in concluding that there was a connection between the payment received from the Province of British Columbia and the loss of employment, made the following comments:
"The definition of "retiring allowance" in subsection 248(1) is unequivocal, ... the provision is clear and does not impose the requirement that the payment originate with the employer."
and then, after quoting from Merrins,
"...the appropriate test is to ask "but for the loss of employment would the amount have been received?" If the answer to that question is in the negative, then a sufficient nexus exists between the receipt and the loss of employment for the payment to be considered a retiring allowance."
and finally
"It is quite clear then that in addition to the "but/for" test, where the purpose of a payment is to compensate a loss of employment it may be considered as having been received "with respect to" that loss."
The facts in the situation described above is a combination of the fact situations in the Merrins and Overin cases. There is a loss of employment, the filing of a grievance, a settlement and a payment from a third party to the employee. It is therefore our view that the reasoning in the Merrins and Overin cases is equally applicable to this situation and that the payments received from the union would be "in respect of" the loss of employment. Accordingly, the payment received from the union would be a "retiring allowance" pursuant to paragraph (b) of the definition thereof in subsection 248(1) of the Act and be included in computing the employee's income for tax purposes in the year it is received pursuant to subparagraph 56(1)(a)(ii) of the Act.
The Interpretation Bulletin referred to in this letter may be obtained from your local tax services office or from our Internet web site (www.ccra-adrc.gc.ca).
Yours truly,
John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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