7 March 2008 External T.I. 2007-0239411E5 - Lump-sum arbitration awards-collective bargaining

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: 1. Can a taxpayer rely on the rules in section 110.2 and section 120.31 with respect to a lump-sum amount that may be received to a wage settlement under a collective bargaining agreement that was subject to binding arbitration. 2. T4 reporting of such amount - are the T4 slips for the prior tax years retroactively amended.

Position: 1. Possibly, question of fact. 2. No, the amount is reported on the T4 for the tax year in which it is received.

Reasons: The law.

XXXXXXXXXX 							Michael Cooke
								2007-023941
March 7, 2008

Dear XXXXXXXXXX :

Re: Lump-sum arbitration awards - collective bargaining

We are writing in response to your electronic correspondence of June 4, 2007 concerning an expected arbitration award under a collective bargaining process.

We understand from your correspondence that your client (a union) is in a collective bargaining dispute with the employer. The dispute period spans XXXXXXXXXX calendar years through to 2007 and the wage amounts and other disputed issues are now subject to a binding decision by an independent arbitration panel. You also indicate that it is expected that the arbitration panel will order retroactive wage increases of approximately XXXXXXXXXX % applicable to each of the XXXXXXXXXX years.

You would like to know if the employer could be compelled to issue amended T4 slips for each of the prior years to report the additional employment income earned by the employees as a result of the expected decision of the arbitration panel.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as set out in Information Circular IC 70-6R5 dated May 17, 2002. Where the particular transactions are completed the inquiry should be addressed to the relevant tax services office. Notwithstanding the above, we are prepared to provide the following general comments, which may be of assistance.

Income from employment must be reported on the T4 slip for the taxation year in which the income is received. As such, it is not possible for the employer to retroactively amend or issue a revised T4 slip to an employee to include an amount that was received by the employee in the current taxation year as a retroactive wage increase even though all or a portion of the amount received may relate to services performed by the employee in a prior taxation year.

Notwithstanding the above, sections 110.2 and 120.31 of the Income Tax Act (the "Act") may provide relief to certain individuals who receive taxable lump-sum payments from their employer relating to services that were performed in prior years. Under these provisions, if an individual's current tax liability under Part I of the Act for such a lump-sum amount is higher than it would have been if each portion of the particular lump-sum amount had been taxed in the particular taxation year in which it otherwise relates the individual's tax liability is essentially computed based on the lower amount of notional Part I tax.

More specifically, in computing taxable income for a tax year, section 110.2 of the Act permits individuals to deduct the total of all amounts each of which is a "specified portion" of a "qualifying amount" received by the individual in the particular year if the total is $3,000 or more (excluding interest). In addition, a qualifying portion must relate to an "eligible taxation year". Each of these highlighted terms is defined in subsection 110.2(1) of the Act.

For the purposes of this special tax calculation a "qualifying amount" is defined, in part, as a lump-sum amount received pursuant to:

(1) an order or judgment of a competent tribunal,

(2) an arbitration award or

(3) a contract by which the payor and the individual terminate a legal proceeding.

In our view, a lump-sum amount that is received as part of the normal collective bargaining process would not be a qualifying amount. However, if the particular lump-sum amount is paid to the individual as the result of a binding arbitration award resulting from a bona fide arbitration process that is specifically applicable to that individual, then it might be possible for such a lump-sum amount to be a qualifying amount provided the other conditions described in that definition are met.

Where an amount is deducted under subsection 110.2(2) of the Act, section 120.31 of the Act provides for the calculation of an individual's tax payable for that taxation year on the amount deducted. The tax is the total of the additional notional taxes payable that would be triggered for each relevant preceding year (i.e. eligible taxation year) if the specified portion of the lump-sum payment that relates to that preceding year was added to the individual's income for that tax year. A notional amount of interest is also added to the additional tax computed for each relevant preceding year to take into account the fact that this additional notional tax was not paid during those preceding years.

To take advantage of this special tax calculation an individual must also file form T1198, "Statement of Qualifying Retroactive Lump-Sum Payment", with his or her tax return for the year in which the particular lump-sum amount was received. It should be pointed out that this special tax calculation would only be of benefit where the receipt of the lump-sum payment by the particular individual in the current taxation places the individual in a higher tax bracket than would otherwise be the case if the specified portion of such amount was received in the particular taxation year to which it relates.

We trust that these comments will be of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch