2 June 2005 External T.I. 2005-0112151E5 - Information Returns

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.

Principal Issues: Whether the person making a repayment of benefits under subsection 46(1) of the Employment Insurance Act must file an information return for such amounts.

Position: No.

Reasons: There is no requirement under the Act or the Employment Insurance Act to file an information return. The T4 supplied by HRSDC will reflect the net benefits received by a claimant.

2005-011215
XXXXXXXXXX A. Seidel, CMA
(613) 957-2058
June 2, 2005

Dear XXXXXXXXXX:

Re: T4A Information Returns

We are writing in response to your January 18, 2005 facsimile in which you request our views as to whether certain amounts must be included in T4A information returns.

Background

An employer files for bankruptcy and terminates all of the employees. The former employees file a claim against the former employer, thereby becoming creditors of the company. The former employees also apply for benefits under the Employment Insurance Act. Prior to the receipt of a judgment with respect to the former employees' claims, some of the former employees sell their claims against the former employer to a third party discounter. The amount paid to a former employee by the discounter is significantly less than a former employee's claim against the former employer. In 2004, the court renders its judgment in favour of the creditors.

The amount that the trustee in bankruptcy must pay the former employees, and the third party discounter, has to be reduced by the amount of any employment insurance benefits overpayment that a former employee must reimburse Human Resources and Skills Development Canada ("HRSDC"). Where a former employee has assigned his/her claim to a third party discounter, you query whether the trustee must provide the third party discounter or the former employee with a T4A information return. You also query whether the amount included on the T4A information return is the actual amount payable pursuant to the court judgment or the net amount payable after taking into account the employment insurance benefits repayment to HRSDC.

Our Comments

The particular circumstances in your letter on which you have asked for our views are in respect of a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, you should submit all relevant facts and documentation to the appropriate tax services office for their views since your situation involves specific taxpayers and completed transactions. However, we are prepared to offer the following general comments which may be of assistance.

Where a former employee files a claim for entitlement to a severance against a former employer, and a court accepts such a claim, the former employee has "acquired" a right to receive an amount from the former employer. Where the amount that the former employee is entitled to receive is a "retiring allowance", within the meaning thereof in subsection 248(1) of the Income Tax Act (the "Act"), any amount received by the former employee, from the trustee in bankruptcy, would be included in computing income, for income tax purposes, pursuant to paragraph 56(1)(a)(ii) of the Act and the trustee would be required to provide the former employee with a T4 information return.

Where a former employee sells the "right" to receive a retiring allowance to an arm's length party before any amount is received by the former employee, the former employee will have a "disposition", within the meaning thereof in subsection 248(1) of the Act, of the "right". Such a disposition will give rise to a capital gain to the former employee. The amount of the capital gain will be computed pursuant to paragraph 39(1)(a) of the Act.

Any amount subsequently received by the third party purchaser of the "right" will be considered to be part of its income earned from a business. The purchaser of the right will be considered to be carrying on the business of the purchasing of such "rights". Any amounts received by the third party purchaser would no longer be considered to be a "retiring allowance". Such amounts would be included in computing the business income of the third party purchaser. Furthermore, since such amounts are not described in subsection 153(1) of the Act or subsections 200(2) or 201(1) of the Income Tax Regulations, there is no requirement on the payer of such amounts to include such amounts in an information return.

Pursuant to subsection 46(1) of the Employment Insurance Act (the "EI Act") if, under a court judgment, a trustee in bankruptcy becomes liable to pay earnings, including damages for wrongful dismissal, to a claimant and the trustee in bankruptcy has reason to believe that benefits have been paid to the claimant for that period, the trustee in bankruptcy shall ascertain whether an amount would be repayable under section 45 of the EI Act and, if so, shall deduct the amount from the earnings payable to the claimant and remit it to the Receiver General as an overpayment of benefits. Section 45 of the EI Act provides that where a claimant receives benefits for a period and any person becomes liable to pay earnings, including damages for wrongful dismissal, to the claimant for the same period, the claimant shall repay an amount equal to the benefits that would not have been paid if the earnings had been paid or payable at the time the benefits were paid to the claimant.

Pursuant to subparagraph 56(1)(a)(iv) of the Act, a taxpayer must include in income any amount received as a benefit under Part I of the EI Act. Pursuant to subsection 200(1) of the Regulations, the taxpayer will receive an information return (T4) in respect of such benefits received. Pursuant to paragraph 60(n) of the Act, a taxpayer is entitled, in computing income for income tax purposes, to a deduction for any amount paid in the year as a repayment of a benefit described in subparagraph 56(1)(a)(iv) of the Act. This would include those situations where another person remits such repayment on behalf of the taxpayer. Although there is no formal information return applicable to a repayment of employment insurance benefits, the person making a repayment on behalf of another person would be responsible for providing the affected person with the necessary information required by that person to file their income tax returns.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch