1993 Internal T.I. 9315047 F - Workers Comp and Wage Loss Replacement Plan Income

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.

January 5, 1994

Paragraph 6(1)(f) Income from Wage Loss Replacement Plans

Paragraph 56(1)(v) Workers' compensation

This is in response to your memorandum of May 14, 1993 requesting assistance in the following situation:

An injured employee is in receipt of wage loss replacement plan income, taxable under paragraph 6(1)(f) of the Income Tax Act (the Act) in each of the 1988 and 1989 taxation years. In 1990, the employee receives a lump sum payment from a workers' compensation board which amount represents compensation due to the claimant in 1988, 1989 and 1990. The employee's only income in 1990 is from the workers' compensation board. The employee is either required to reimburse the wage loss replacement plan for benefits received from the plan during the period throughout which the duties of office or employment were not performed or the plan reimbursement is paid on behalf of the employee by the workers' compensation board.

You have asked whether:

1.      the employee should claim a paragraph 8(1)(n) deduction in 1990 in respect of the reimbursement paid by or on behalf of the taxpayer; any non-capital loss that may be created is carried back to 1988 and 1989; or,

2.      the 1988 and 1989 returns should be reassessed to delete the wage loss replacement plan income and report the amounts received in those years as workers' compensation taxable under paragraph 56(1)(v) of the Act with a corresponding deduction under subparagraph 110(1)(f)(ii).

It is our view that, of the two alternatives above, alternative (1) above is the technically accurate response. The 1981 Notice of Ways and Means Motions states that paragraph 8(1)(n) of the Act was added, applicable to the 1981 and subsequent taxation years, for the purpose of allowing any employee who, out of the proceeds of a workmen's compensation award paid to him or her in respect of a particular injury, reimburses his/her employer for any salary or wages paid the employee. Given that the legislation was enacted for purposes such as described in your scenario, we feel that this interpretation is correct and accurately reflects the intent of the legislation. Where the nature of the payment received by the employee in 1988 and 1989 is salary and wages, or more specifically, benefits from a wage loss replacement plan taxable under paragraph 6(1)(f) of the Act, the nature of the payment cannot retroactively be changed to reflect that the employee received workers' compensation payments in 1988 and 1989 when the employee did not receive workers' compensation in those years nor was the entitlement to receive workers' compensation in respect of any year established until 1990. The availability of a loss carryback to a taxpayer is a question of fact and can only be calculated on a case by case basis. We have insufficient information to determine why a loss carryback was denied to a particular taxpayer referred to by you but assume that in his/her case the amount of the non-capital loss as calculated under paragraph 111(8)(b) of the Act was zero despite the fact that a paragraph 8(1)(n) deduction was taken in the current year.

We would also refer you to the position set out in paragraph 7 of Interpretation Bulletin IT-202R2 which states:

"Where it can be established that an employee received a loan or advance from his or her employer which is to be repaid from future payments of compensation, the loan or advance constitutes neither income to the employee nor deductible expense to the employer."

This position is reflected in other Departmental publications such as on page 45 of the 1992-1993 Employers' Guide to Payroll Deductions. In our telephone conversation of November 8, 1993 (Short/Yazbeck), you stated that the example quoted by you is for illustrative purposes only and that in fact you have several outstanding enquiries of a similar nature. We recommend that each case be reviewed to determine the true nature of the payments received in 1988 and 1989.

Where the agreement between the employee and the employer or administrator of the wage-loss replacement plan clearly illustrates that the payments to the employee are an advance rather than income, you may wish to adjust the prior year returns of the employee and the employer to accurately reflect the nature of the payment received. The terms of the agreement should clearly indicate that the payments made to the employee constitute a loan or advance and that such payments are contingent upon the employer or the plan being paid back when the claim for workers' compensation is adjudicated. To determine whether an amount is income, the amount received must have the quality of income, that is, the employee's entitlement or right to the amount must be "absolute and under no restriction, contractual or otherwise, as to its disposition, use or enjoyment" (citation taken from Kenneth B.S. Robertson Limited v. M.N.R. (1944) 2 DTC 655 (Ex. Ct.)). In Robertson, a leading case on the test of receipt, the court examined certain advance fees made to a taxpayer and held that they were not income because they did not meet the "absolute right" test as quoted above.

If a review of any of the specific cases you have results in a determination that the monies received by a taxpayer in 1988 and 1989 constitute an advance or loan, we would add that there may be some administrative or housekeeping concerns to consider. For example, where deductions in respect of Canada Pension Plan contributions and Unemployment Insurance have been withheld from the payments made in 1988 and 1989 (the fact that the employer or administrator withholds source deductions may be indicative that the monies were not considered a loan or advance) when in fact the monies were a non-taxable advance not subject to source deductions, then it is our view that the taxpayer's 1988 and 1989 T4 returns may need to be amended such that insurable earnings and pensionable earnings of the employee are accurately reflected. If you require assistance in this regard, you may contact the Source Deductions Division.

We trust that the above comments are of assistance to you.

J.A. Szeszyckifor Section Chief

Personal and General SectionBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

c.c.'s: Source Deductions Division Client Assistance Directorate Assessment of Returns Directorate