14 March 2019 External T.I. 2019-0796871E5 - QRLSP through arbitration

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 amounts received through an arbitration process as part of collective bargaining would be a qualifying amount, as defined under subsection 110.2(1).

Position: Likely yes, assuming all other conditions are met.

Reasons: An amount received under an arbitration award can be a qualifying amount.

XXXXXXXXXX								2019-079687
									Eric Wirag, CPA, CMA
March 14, 2019

Dear XXXXXXXXXX:

Re: Qualified Retroactive Lump Sum Payments

This is in reply to your email of March 7, 2019 requesting our written confirmation of whether or not a specific arbitral award is eligible as a qualified retroactive lump-sum payment (QRLSP) for purposes of section 110.2 of the Income Tax Act (the Act). More specifically, you are seeking confirmation of whether the payments would be considered qualifying amounts as defined in subsection 110.2(1) of the Act. Your incoming emails state that it is your interpretation that these payments would not be eligible as a QRLSP. We also acknowledge our telephone conversation (XXXXXXXXXX/Wirag) on March 7, 2019.

You also provided us with the Arbitration Board report and decision (“Decision”), dated XXXXXXXXXX. The Decision documents that the employee bargaining unit and the Employer had been involved in collective bargaining. A number of provisions had been agreed to and signed off by both parties through the collective bargaining process. But a number of other provisions remained unresolved and arbitration was requested by the bargaining unit pursuant to XXXXXXXXXX. A three-person arbitration board was appointed and a number of conclusions were made to resolve the issues. It is our understanding that the decisions from the arbitration board were ultimately implemented.

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R8, Advance Income Tax Rulings and Technical Interpretations.

Section 120.31 of the Act provides for a special tax calculation that applies to individuals who receive a QRLSP in a taxation year, where the 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.

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 terms is defined in subsection 110.2(1) of the Act. 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.

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, if the particular lump-sum amount is paid to the individual as the result of an arbitration award resulting from a bona fide arbitration process, such a lump-sum amount could be a qualifying amount. This could apply even when the arbitration process is part of a normal collective bargaining process.

Based on the Decision, it appears that the XXXXXXXXXX% Market Adjustment identified in paragraph XXXXXXXXXX of the Decision could be considered a qualifying amount since it is awarded as a result of the arbitration process. The annual increases for each of the XXXXXXXXXX years identified in the same paragraph would not be considered qualifying amounts as these amounts were agreed to by both parties (as noted in paragraph XXXXXXXXXX of the Decision) and are not part of the arbitration award.

We trust our comments will be of assistance.

Yours truly,

Lita Krantz, CPA, CA
Manager, Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate