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 lump sum payment received pursuant to an arbitration award is "remuneration" within the meaning thereof in subsection 100(1) of the Regulations.

Position: Yes.

Reasons: The lump sum payment is an accumulation of retroactive wage and salary increases which were awarded pursuant to arbitration.

		December 23, 2002

	CPP/EI Rulings	HEADQUARTERS
	Ottawa Tax Services Office	A. Seidel, CMA
	333 Laurier Ave. W. 	(613) 957-2058

Attention: Sylvie Bouchard
CPP/EI Complex Case
Technical Resource Officer 2002-017020

Retroactive Lump Sum Payment

This is in reply to your October 24, 2002 facsimile. You have requested our comments with respect to whether a lump sum payment to an employee or former employee of the XXXXXXXXXX (the "Employer") is subject to CPP, EI and withholding of income tax.

Background

1. The Employer is a non-profit organization providing residential, educational and support services to adults with disabilities.

2. Over a period of XXXXXXXXXX years, the Employer and the union representing the employees/former employees were unsuccessful in negotiating a first collective agreement.

3. The Employer and the union arrived at a collective agreement through an arbitration process under the XXXXXXXXXX. The arbitration decision was made on XXXXXXXXXX. The settlement included a retroactive wage settlement that was effective XXXXXXXXXX.

4. In XXXXXXXXXX, the Employer made a retroactive, lump sum payment wage payment based on the arbitration decision. The Employer did not withhold CPP or EI from the wage payments. The Employer states that this was done in accordance with verbal approval from someone through a toll free number of the Canada Customs and Revenue Agency ("CCRA"). The Employer's payroll provider confirmed that, based on their own similar experience, CPP and EI did not have to be withheld on the retroactive lump sum payments.

5. The Employer is now being reassessed for CPP and EI on the retroactive payments. The Employer has asked the CCRA to reconsider the assessment on the basis that it would cause considerable financial hardship to the Employer.

Issue

Whether or not the retroactive lump sum payments are subject to CPP and EI is determined by whether or not the amounts are pensionable and insurable. The amounts are pensionable and insurable if they are considered to be employment income.

Our Comments

Chapter 2 of the "Employers' Guide: Payroll Deductions" (the "Guide") states that an employer generally has to deduct CPP contributions from payments made for "salary, wages, or other remuneration".

In general terms, the Employment Insurance Act determines "insurable earnings" by reference to "insurable employment". Chapter 3 of the Guide states that an employer has to withhold EI premiums from each dollar of insurable earnings up to a yearly maximum. Under the Employment Insurance Act, "insurable employment" includes most employment in Canada under a contract of service, i.e. where an employer-employee relationship exists.

Paragraph 153(1)(a) of the Act generally deals with the withholding of tax and includes a reference to "Every person paying at any time in a taxation year ... salary, wages or other remuneration". The amount of tax to be withheld is determined pursuant to sections 100 to 108 of the Income Tax Regulations (the "Regulations"). The definition of "remuneration" in subsection 100(1) of the Regulations provides that it includes any payment that is paid to an employee or former employee.

We would also point out that Chapter 5 of the Guide makes it very clear that an employer has to deduct CPP, EI and income tax from any payment of "bonuses and retroactive pay increases".

Section 103 of the Regulations provides specific details of the amount of tax withholding that is required on a lump sum "retroactive increase in remuneration".

It is therefore our view that the lump sum payment of retroactive wages and/or salary by the Employer to existing employees is considered to be employment income that is pensionable, insurable and subject to withholding of income tax, similar to any other payment of wages, salary or other remuneration. Similarly, the lump sum payment of retroactive salary and wages by the Employer to former employees is also subject to CPP, EI and income tax withholding.

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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