13 November 2008 External T.I. 2008-0294041E5 - Taxation and Insolvency

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 a payment, made to employees of a corporation to settle claims for wages as part of a compromise under the Companies Creditors' Arrangement Act, is subject to income tax withholdings.

Position: Yes.

Reasons: S. 153(1)(a) and Regulation 100.

									2008- 029404
XXXXXXXXXX 								Lindsay Frank
(613) 948 -2227
November 13, 2008

Dear XXXXXXXXXX :

Re: Withholding Obligations - Payments to Settle Claims for Wages - Companies' Creditors Arrangement Act

This is in reply to your email in which you ask whether a payment, made to employees of a corporation to settle claims for wages as part of a compromise or arrangement under the Companies' Creditors Arrangement Act ("CCAA"), is subject to income tax withholdings. As explained below, the Canada Revenue Agency ("CRA") takes the position that such a payment is subject to income tax withholdings.

Pursuant to subsection 5(1) of the Income Tax Act ("the Act"), income for a taxation year from an office or employment is the salary, wages, and other remuneration, including gratuities, received by a taxpayer in the year. Regulation 100 of the Act defines "remuneration" to include any payment related to salary or wages paid to an officer or employee, or a former officer or employee.

Subsection 153(1) of the Act requires a person to deduct and withhold an amount from certain payments made. In particular, paragraph 153(1)(a) requires a person paying a wage, salary or other remuneration, to deduct or withhold from the payment an amount determined in accordance with prescribed rules, and to remit such amount at the prescribed time to the Receiver General.

For paragraph 153(1)(a) to apply, an employer-employee relationship is not necessary; rather, three conditions must be met: Coopers and Lybrand Ltd. v. Canada ([1994] 2 C.T.C. 2244 (F.C.A.)). First, payments to employees must have been made; second, such payments must have been made with respect to wages or salaries due to the employees, and third, the person sought to be held liable must have made such payments. Thus, regardless of whether or not the payor of a wage or salary, for example, is an employer, a deduction and a withholding are required under the Act.

In a proceeding under the CCAA, the debtor company is afforded an opportunity to restructure its affairs in a manner that will permit it to remain as a going concern. That company remains in possession and control of its affairs, under the supervision of a court-appointed monitor: Re Alternative Fuel Systems Inc., (47 C.B.R. (4th) 155 (Alta. C.A.)). This is typified in section 12, which allows the company to initially accept or reject a claim by a creditor, following which, the court, on summary application by the company or the creditor, shall determine the status of the claim.

The control factor arose in the case of Marché Lambert & Frères, (2008 D.T.C. 3815 (T.C.C.)) where the Court found that the person, in that case a payroll services provider, must not only pay the wages and salaries, but must also have the power to make decisions regarding the payment of the wages and salaries.

Another key feature of the CCAA is that it stays all proceedings by creditors against the company. The company can terminate contracts before or after the initial filing of the plan of arrangement, provided the plan permits creditors to have a right to assert damage claims arising from the repudiation. If these are the circumstances behind the employees' claims, the CRA regards the payment of such claims as remuneration. Consequently, the person paying the remuneration under the terms of the plan of arrangement must deduct and withhold an amount from the remuneration, pursuant to paragraph 153(1)(a) of the Act.

In the situation you have presented, the employees will have filed a claim pursuant to section 12 of the CCAA. Section 12 of the CCAA refers to the BIA with respect to the meaning of "claim", and to the determination of the amount of the claim. Notwithstanding this reference, however, section 12 of the CCAA does not direct the importation of all the provisions of the BIA into the CCAA, when determining the amount of the claim; further, the objects of the BIA and the CCAA are distinct, and each must be interpreted with its respective purposes in mind: Re Alternative Fuel Systems Inc., (47 C.B.R. (4th) 155 (Alta. C.A.)).

Further, in Mine Jeffrey and Raymond Chabot Inc., No. 450-05-005118-027 (Que. S.C.), an application was made under the CCAA for directions regarding the payment of termination pay to former employees. The monitor had asserted that, as the employees were being compensated for the loss of benefits from employee benefit plans, the payment was not taxable, and therefore was not subject to income tax withholdings. On the other hand, the CRA took the view that the amounts payable were linked to past employment and consequently were taxable in the hands of the ex-employees.

The Court rejected the monitor's assertion. It took into consideration that the Act was based on the principles of self- assessment and self-reporting, and was of the view that the person required to self-assess and self-report would not be able to determine whether the amount received was taxable, until he or she has provided the tax authorities with its return of income and been advised whether the amount declared was taxable.

You cited the Employers Guide, wherein the CRA has taken the position that in a bankruptcy context, amounts, paid by a trustee to employees of the bankrupt corporation to settle claims for wages, are not subject to any withholdings. That position does not extend to proceedings under the CCAA, where the intent of the legislation is to facilitate the survival of the business. Bankruptcy, on the other hand, contemplates the liquidation of the company's assets, and the inherent cessation of the business.

The CRA's position with respect to a bankruptcy emanates from the decision in Re J. Pascal Inc., 27 C.B.R. (4th) 44, where the Quebec Court of Appeal upheld the lower court's decision that characterised a payment of wage claims by a trustee in bankruptcy to former employees as a dividend payment, pursuant to paragraph 136(1)(d) of the Bankruptcy and Insolvency Act ("BIA"). The Court held that the payment was not in respect of a wage, but rather in respect of a claim; hence, income tax withholdings were not required. The employees, in that instance, had filed a claim pursuant to section 124 of the BIA.

I trust you find this satisfactory.

B. J. Skulski
Manager
Insolvency and Administrative Law Section
Business and Partnerships Division
Income Tax Rulings Directorate