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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether a pay equity payment will be a "qualifying amount" for purposes of subsection 110.2(2) of the Act.
Position: Question of fact.
Reasons: Subsection 110.2(2) of the Act will apply to all payments that satisfy all of the requirements of the definition of "qualifying amount".
December 4, 2002
Client Services Directorate HEADQUARTERS
Individual Programs Section A. Seidel, CMA
7th Floor, 750 Heron Road East Tower (613) 957-2058
Attention: Jodie McGetchie
Senior Programs Officer
2002-016875
Pay Equity Payment
This is in reply to your October 16, 2002 memorandum and your November 20, 2002 facsimile. You have requested our comments with respect to the proposed pay equity payments that XXXXXXXXXX (the "Employer") will be making to members and former members of the XXXXXXXXXX (the "Recipients") and whether such payments would be a "qualifying amount", within the meaning thereof in subsection 110.2(1) of the Income Tax Act (the "Act"), for the purposes of subsection 110.2(2) of the Act. You have also requested our comments with respect to the determination of the appropriate date that the pay equity payments are considered to have become payable to the Recipients. This is relevant for determining whether subsection 70(1) or 70(2) of the Act applies to any employees/former employees who have died before the actual payment of the amount owing to a Recipient pursuant to the pay equity settlement.
Background
1. The Recipients filed pay equity complaints with the Canadian Human Rights Commission (the "CHRC") in XXXXXXXXXX.
2. The Employer and the Recipients undertook a joint pay equity study in XXXXXXXXXX. The CHRC agreed to use this study as the basis for assessing the pay equity complaints.
3. The Recipient's union filed additional pay equity complaints in XXXXXXXXXX. The CHRC attempted to mediate a settlement but failed to do so. The complaints were referred to the Canadian Human Rights Tribunal (the "CHRT").
4. The Employer commenced numerous court actions in the Federal Court, Trial Division and the Federal Court of Appeal concerning the referral to the CHRT.
5. The Federal Court, Trial Division determined that the CHRT was insufficiently independent to deal with the pay equity issue. The federal government amended the Canadian Human Rights Act.
6. The Employer and the Recipients' union reached a tentative agreement in XXXXXXXXXX. The tentative agreement was rejected by the Recipients.
7. Numerous additional court actions were commenced in respect of various issues. In XXXXXXXXXX, the Supreme Court of Canada granted the Employer leave to appeal to hear its arguments that the CHRT was still insufficiently independent to deal with the pay equity issue.
8. On XXXXXXXXXX, the Employer announced that the proposed pay equity settlement of XXXXXXXXXX had been ratified with the Recipients.
9. The XXXXXXXXXX sitting of the CHRT dealt with the Recipients' withdrawal of their pay equity complaints, the Employer's consent to such withdrawal and the confirmation that the CHRC had reviewed the proposed settlement and "takes no position" with respect to the withdrawal. The end result of the sitting was a declaration by the CHRT that the withdrawal of the complaints meant that the matter was no longer before the CHRT and, therefore, it would not be making any decision with respect to the complaints.
10. The CHRT's acceptance of the withdrawal of the complaints was the final step in the settlement of the pay equity complaints filed by the Recipients.
Analysis
Subsection 110.2(2) of the Act allows an individual (other than a trust) a deduction, in computing taxable income for a particular taxation year, for "all amounts each of which is a specified portion of a qualifying amount received ... in the particular year" provided the amount received is equal to, or greater than, $3,000.
Subsection 110.2(1) of the Act defines "specified portion" and "qualifying amount". The "specified portion", in relation to an "eligible taxation year", also defined in subsection 110.2(1) of the Act, of a qualifying amount received by an individual, is that portion of the qualifying amount that relates to the year, to the extent that the individual's eligibility to receive the portion existed in the year. A payment received by an individual in a taxation year will be a "qualifying amount" if, among other things, the amount "is received pursuant to an order or judgment of a competent tribunal, an arbitration award or a contract by which the payor and the individual terminate a legal proceeding".
Issue
Will the Employer's proposed pay equity payments be an amount received by the Recipients "pursuant to an order or judgment of a competent tribunal, an arbitration award or a contract by which the payor and the individual terminate a legal proceeding"?
The payments to the Recipients arose as a result of the settlement of a number of complaints against the Employer. These complaints had been brought before the CHRC. When the CHRC could not resolve the complaints, they referred the complaints to the CHRT for adjudication. In this particular case, the matter was resolved between the two parties before the CHRT rendered its decision. The final step in the settlement of the pay equity complaints was the CHRT's acceptance of the withdrawal of the complaints against the Employer. This was done on XXXXXXXXXX.
The special tax calculation in subsection 110.2(2) of the Act applies to individuals who receive certain qualifying retroactive lump-sum amounts in a taxation year that relate to a preceding taxation year. One such qualifying retroactive lump-sum payment is an amount received by an individual pursuant to a contract in which the individual and the payor terminate a legal proceeding. The interest portion of any lump-sum amount is taxable in the year received, and is not eligible for the special tax calculation.
Based on the facts of the particular situation, it is our view that the combination of the XXXXXXXXXX pay equity settlement ratification by the Recipients and the XXXXXXXXXX acceptance, by the CHRT, of the withdrawal of the complaints referred from the CHRC, terminated a legal proceeding. Accordingly, it is our view that the pay equity payments to be received by the Recipients will be a "qualifying amount" within the meaning thereof in subsection 110.2(1) of the Act. Where a Recipient receives a lump sum of $3,000 or more, the Recipient will be entitled to a deduction, in computing taxable income, pursuant to subsection 110.2(2) of the Act.
In your November 20, 2002 facsimile, you ask for our views as to the appropriate date to be used in determining when the pay equity payments became payable to the Recipients. Provided that the XXXXXXXXXX sitting of the CHRT was truly the final step in the process of resolving the pay equity dispute between the Employer and the Recipient, it is our view that this would be the date when the pay equity payments would be payable to the Recipients. It is at this point in time that the Recipients would have a legal entitlement to receive the pay equity payment from the Employer. This would then become the date that is relevant for purposes of determining the amounts to which subsection 70(1) or 70(2) of the Act would apply.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. 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 electronic library 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
Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
John Oulton, CA
Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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