1 September 1988 Income Tax Severed Letter 5-5973 - [Retroactive Wages Paid on Reinstatement to Employment Previously Terminated]

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.

F.B. Fontaine (613) 957-2140

Attention: XXXX

SEP 1 1988

Dear Sirs:

Re: Retroactive Wages Paid on Reinstatement to Employment Previously Terminated

This is in reply to your letter of April 25, 1988 concerning the above subject matter. We apologize for the delay in responding. Our understanding of situation 1 is as follows: An employee's employment was terminated. Subsequently, the employee's employer was ordered by a court or tribunal to reinstate the employee and to compensate him for lost wages owed to the employee from the date of the termination to the date of reinstatement.

You request our position regarding:

(1) the year in which such compensation is to be included in the employee's taxable income;

(2) whether the taxpayer can allocate the income over the years for which the compensation has been paid or whether he must bring it into income in the year in which the payment is actually received;

(3) whether the taxpayer can make registered retirement savings plan contributions for each of the years for which retroactive pay has been ordered, and paid;

(4) what level of withholding must be made by the employer from such payment; and

(5) how is any payment on account of interest on this retroactive pay to be treated for tax purposes.

Since the compensation would be retroactive wages due to the employee any amount of such compensation would be included in computing the employee's income in the year in which it was received pursuant to subsection 5(1) of the Income Tax Act (the "Act"). Therefore, an allocation of the income over the years for which the compensation is paid would not be possible.

The amount of a premium that may be made under a registered retirement savings plan ("RRSP") and deducted in computing income for a taxation year is the "... premium paid by the taxpayer ... during the year or within 60 days after the end of the year..." pursuant to paragraph 60(i) and subsection 146(5) of the Act. Accordingly, a payment to an RRSP in respect of a year may not be deducted as a premium where it was made later than 60 days after the end of the particular year.

Any amount received by an employee as retroactive wages in a taxation year will be subject to withholdings at source by the employer. The employer should consult the guide entitled "Tables - Income tax deductions at source" to determine the amount to be withheld from the payment. For practical purposes the payment would be allocated over the pay periods of the employee that have elapsed in the year up to the time of payment and tax would be withheld in accordance with the Tables.

As stated in paragraph 12 of Interpretation Bulletin, IT-396R , interest does not arise unless there is an amount due to another person for the period for which the interest is calculated. Therefore, any interest calculated on wages or salary owed to an employee would be taxable as interest income in the hands of the employee in the year in which it is received or becomes receivable pursuant to paragraph 12(1)(c) of the Act.

Our understanding of situation 2 is as follows:

XXXX

In respect of this situation you pose the following questions:

(i) Is the amount paid to the employee considered to be income from employment and paid to the employee, and taxable in the hands of the employee, in 1988?

(ii) Is the answer to (i) the same, regardless of whether the employee is reinstated, and if not, how does it vary as between an employee who is reinstated and one who is not?

(iii) If the answer to (i) is no, is the employee entitled to file an emended income tax return for 1983, 1984, 1985, 1986, and 1987, allocating the settlement amount between those respective taxation years?

(iv) If the answer to (iii) is yes, is the employee entitled to make contributions to a Registered Retirement Savings Plan, with the consequent income tax effects, for each of or for any of 1983, 1984, 1985, 1986 and 1987?

In answer to (i) above, an amount received by the employees in respect of retroactive wages would be considered to be income from employment of the employees for the year in which it was received pursuant to subsection 5(1) of the Act. An amount received in 1988 would be taxable in that year.

The answer to (i) would be the same whether or not the employee is reinstated. An amount received by a taxpayer as salary or wages, whether or not it is received retroactively, would be taxable under subsection 5(1) of the Act as income from an office or employment. Not being employed (or reinstated) at a time retroactive wages were received would not change the nature of the income for the purposes of that subsection.

Based on our answer to (i) above an answer to (iii) is not required. The answer to (iv) is provided in the pre-penultimate paragraph under situation 1 above.

We trust the information given will be helpful to you.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch