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: What is the appropriate tax treatment of an amount received as an arbitration award after a breach of the collective agreement between an employer and an employee.

Position: In this particular case, income from an office or employment.

Reasons:

The amount received by the employee is compensation for lost wages and the payment "arose clearly and unequivocally by virtue of the contract of employment" such that it is considered to be income from an office or employment and included in income for tax purposes pursuant to subsection 5(1) of the Act.

		February 7, 2001

	Simone Rosengren	HEADQUARTERS
	A/Senior Programs Officer	A. Seidel, CMA
	CPP/EI Eligibility Division	(613) 957-2058
	Revenue Collections Directorate

	Attention: Heather Antle
		2000-005973

Employment Insurance Deductions

This is in reply to your memorandum dated November 30, 2000 in which you requested our comments with respect to the proper income tax treatment of the amount received by the taxpayer in the following situation.

Background

1. XXXXXXXXXX ("Mr. B") was an employee of XXXXXXXXXX (the "Company") from XXXXXXXXXX. As an employee of the Company, he was a member of the XXXXXXXXXX (the "Union").

2. The Company maintained a list of employees, in sequential order, which list was used to call employees to work.

3. Mr. B was one of several employees dropped to the bottom of the list by the Company. As a result of this action by the Company, Mr. B filed a union grievance in XXXXXXXXXX.

4. A "Memorandum Of Settlement" (the "Settlement") was agreed to by the Union and the Company on XXXXXXXXXX. As a result of the Settlement, a "Consent Award" (the "Award") was issued on XXXXXXXXXX.

5. As a result of the Settlement and the Award, the Company agreed to return Mr. B to his previous place on the seniority list and to compensate him for all time and monetary benefits lost as a result of being placed at the bottom of the seniority list.

6. Mr. B submitted a "Statutory Declaration" on XXXXXXXXXX outlining the dates and shifts he could have worked and details of the lost wages.

7. As a result of all of the above, Mr. B received $XXXXXXXXXX from the Company as compensation for lost wages.

Issue

Is the $XXXXXXXXXX received by Mr. B salary, wages or other remuneration from an office or employment, and therefore included in computing income for tax purposes pursuant to subsection 5(1) of the Income Tax Act (the "Act"), or is the $XXXXXXXXXX a payment of "damages", and therefore a non-taxable capital receipt to Mr. B.

Our Comments

Whether or not a particular amount received pursuant to an arbitration award is an income receipt or a capital receipt is a question of fact. Pursuant to subsection 5(1) of 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. Once it is determined that an arbitration award is an income receipt, whether or not such income receipt is income from an office or employment as "salary", "wages" or "other remuneration" will be determined by looking at all of the facts surrounding, and all of the particular details of, the arbitration award.

Interpretation Bulletin IT-365R2 ("IT-365R2") discusses the treatment, for tax purposes, of amounts received, amongst other things, as compensation for the loss of income and whether the amount is considered to be an income or capital receipt (paragraph 8). As stated in subparagraph 8(a) of IT-365R2, it is our general 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.

There have been several court cases which have looked at the issue of whether amounts received as an "award" are subject to tax. The courts have used the expressions "damages" and "compensation" in describing these "awards", neither of which is defined in the Act. Black's Law Dictionary defines "damages" as "a pecuniary compensation or indemnity, which may be recovered in the courts by any person who has suffered loss, detriment or injury, whether to his person, property or rights, through the unlawful act or omission or negligence of another". It defines "compensation" as "indemnification; payment of damages; making amends; making whole; giving an equivalent or substitute of equal. That which is necessary to restore an injured party to his former position. Equivalent in money for a loss sustained."

The case of Larry L. Vincent v. The Minister of National Revenue (88 DTC 1422, TCC) dealt with a situation 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."

In this particular case, the Settlement and the Award provide that the grievance of Mr. B is resolved on the basis that, amongst other things, Mr. B will be returned to his previous place on the Company's seniority list and that Mr. B "will be compensated for all time and monetary benefits lost as a result of being placed at the bottom of the seniority list" subject to the restriction that Mr. B will not be entitled to receive compensation if he worked for another employer during the time specified in the Statutory Declaration and the compensation he received from the other employer was equal to, or greater than, the amount that Mr. B would have received working for the Company.

The Statutory Declaration of Mr. B is a sworn affidavit acknowledging his "entitlement to compensation forthwith from the employer". Exhibit "C" of the Statutory Declaration details the date, the shift, the hours and the rates of pay related to when Mr. B would have worked if he had been called to work in accordance with the seniority list of the Company. The amount received by Mr. B is equal to the total lost wages detailed in Exhibit "C".

If Mr. B would have been called in to work on the days outlined in Exhibit "C" of the Statutory Declaration, the amounts received by Mr. B would have been received by him as salary/wages and therefore been included in Mr. B's income for tax purposes pursuant to subsection 5(1) of the Act.

Conclusion

Based on the terms of the Settlement, the Consent Award and Exhibit "C" of the Statutory Declaration, it is our view that the amount received by Mr. B is compensation for lost wages in respect of the days when he should have been called in to work by the Company. As in the Vincent case, the compensation awarded to Mr. B put him in the same position as he would have been in had he been called in to work by the Company as per the seniority list. 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". Accordingly, it is our view that the amount received from the Company by Mr. B would be included in his income, for tax purposes, pursuant to subsection 5(1) of the Act as income from an office or employment.

Subsection 82(1) of the Employment Insurance Act (the "EI ACT") provides that:

"Every employer paying remuneration to a person they employ in insurable employment shall

(a) deduct the prescribed amount from the remuneration as or on account of the employee's premium payable by that insured person under section 67 for any period for which the remuneration is paid;

(b) remit the amount, together with the employer's premium payable by the employer under section 68 for that period, to the Receiver General at the prescribed time and in the prescribed manner."

Paragraph 5(1)(a) of the EI Act provides that "insurable employment" includes "employment in Canada by one or more employers, under any express or implied contract of service or apprenticeship, written or oral, whether the earnings of the employed person are received from the employer or some other person and whether the earnings are calculated by time or by the piece, or partly by time and partly by the piece, or otherwise".

Although the amount received by Mr. B is considered to be income from an office or employment for income tax purposes, it is a question of fact whether or not this amount is "insurable employment" within the meaning thereof in Paragraph 5(1)(a) of the EI Act. To the extent that the amount received by Mr. B is in respect of employment in Canada, from an employer, under a contract of employment, received from the employer and calculated by time, being the hours of work lost, it would appear to us that the amount would be insurable employment and therefore subject to the employment insurance deductions required by subsection 82(1) of the EI Act in the same manner as any other amounts received by Mr. B from the Company as income from an office or employment.

We hope our comments are of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

John Oulton, CA
Section Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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