12 January 2009 External T.I. 2008-0300251E5 - Qualifying amount

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 an amount received from the Province of XXXXXXXXXX as a grievance settlement is a qualifying amount under subsection 110.2(1) of the Act?

Position: no

Reasons: Subsection 110.2(1) definition of qualifying amount requires that the amount be 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. The payment received by the employee according to the grievance settlement was not pursuant to one of these conditions.

XXXXXXXXXX 								2008-030025
									Anne Dagenais

January 12, 2009

Dear XXXXXXXXXX :

Re: Qualifying Retroactive Lump-sum Payment

This is in response to your facsimile dated November 13, 2008. You request our assistance in determining whether an amount paid by an employer as a grievance settlement is considered a qualifying retroactive lump-sum payment ("QRLSP") for purposes of section 110.2 of the Income Tax Act (the "Act") and as described in Form T1198E.

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 a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

In very general terms, we understand that an employer and the Union representing its employees resolved a grievance filed by a particular employee by awarding a retroactive salary payment.

The special tax calculation in subsection 110.2(2) of the Act applies to individuals who receive a QRLSP in a taxation year, which payment relates to one or more preceding taxation years. If the individual's current tax liability under Part I of the Act in respect of this payment is higher than it would have been if each portion of the amount had been taxed in the particular year to which it relates, the individual's tax liability is essentially computed based on the lower amount of notional Part I tax.

In order to qualify for this treatment, the payment must be one of the types described in the definition of "qualifying amount" in subsection 110.2(1) of the Act. In the situation described in your letter, the relevant provision appears to be paragraph (a) of the definition. Accordingly, the amount must be included in computing the individual's income from an office or employment and must have been received pursuant to either 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 following brief explanations may assist in understanding what the foregoing requirements mean. The CRA generally considers that a "competent tribunal" is one with legal jurisdiction granted by a federal or provincial statute to make an order or judgment. An "arbitration award" must be one resulting from a bona fide or formal arbitration process. Finally, a contract terminating a "legal proceeding" would typically refer to what might generically be called an out of court settlement of a legal proceeding authorized by law.

In the situation described, the payment is the result of the conclusion of a dispute between parties who have reached a mutually satisfactory settlement. There does not appear to be an order or judgment of a competent tribunal, nor was the matter referred to a bona fide arbitration process, nor does the settlement represent a termination of a legal proceeding. Consequently, it is our view that none of the elements of the definition of "qualifying amount" in subsection 110.2(1) of the Act are met.

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 and Regulatory Affairs Branch