29 April 1994 Internal T.I. 9409870 - 3 Q'S ON TERMINATION AT 1994 CAN PAYROLL ASSOC CONF

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

-taxation of prejudgment interest on wrongful dismissal
-information slip reporting on reimbursement of legal fees to obtain award
-taxation of employment income on reinstatement where a portion of income is withheld as a repayment of UI benefits received during period not worked

Position TAKEN:

-prejudgement interest issue is under review
-information slip is not required by statute but S.D. encourages inclusion as a footnote
-employment income fully taxable but employee entitled to a deduction under 60(n)

Reasons FOR POSITION TAKEN:

-on 3rd issue, the employee constructively receives the employment income which is withheld and remitted to the Receiver General as a UI benefit repayment

						April 29, 1994

	Source Deductions Division	Rulings Directorate
	District Office and Taxation	A. Humenuk
	 Centre Support Services	957-8953

	Attention: Peter Pustay
						940987

1994 Canadian Payroll Association Conference

We are replying to your memorandum of April 18, 1994 concerning the questions to be posed at the above noted conference relating to payments made to employees upon the termination of their employment. In accordance with our telephone conversation of April 25th (Cousineau/Humenuk) we have redirected our response to the officer who will be preparing the responses.

We have prepared suggested responses for the questions 5, 8 and 15 as submitted by the Canadian Payroll Association on April 25, 1994. Financial Industries Division of this Directorate will be providing you with comments concerning questions 1, 17, 20, 22 and 25 covering the balance of questions which are to be answered by Revenue Canada Custom Excise and Taxation at the forum.

As our responses are based solely on the statutory authority in the Income Tax Act relating to the questions, you may wish to modify them to reflect any administrative practices which you may have. With respect to our suggested response to question 5, the District Office may be prepared to consider a reduction in source deductions under the authority granted to the Director-Taxation under paragraph 900(2)(b) of the Regulations where it is evident that the employee will be entitled to an offsetting deduction. In our telephone conversation of April 25, 1994 (Cousineau\Humenuk), you suggested that paragraph 8(1)(n) of the Act might be an appropriate authority for the deduction by the employee of the amount reimbursed to the Receiver General. It is our view that an employee would not be entitled to a deduction under paragraph 8(1)(n) of the Act for the repayment of unemployment insurance benefits because such benefits were not included in the employee's income from office or employment as is required in order to obtain that deduction.

If you wish to discuss the matter further, please contact the Rulings officer noted above.

B.W. Dath
Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

c.c. Wayne Douglas

DRAFT

Canadian Payroll Association
Termination Forum
May 12, 1994

Question No.5

REPAYMENT OF UNEMPLOYMENT INSURANCE BENEFITS

An employee, who had been terminated, is subsequently reinstated as ordered by a court of law. While unemployed, the individual had been receiving UI benefits. As required by HRD, the employer must deduct the amount of UI benefits paid from the retroactive pay now being paid. Tax has already been withheld at source by HRD from the UI benefits.

a) What deductions at source must the employer withhold?

b) Are these source deductions calculated on the gross pay or the gross pay less the UI benefit repayment amount?

Department's Position

Where an individual's employment has been reinstated on a retroactive basis, any amount received in settlement of forgone salary, wages or other benefits is treated as income from employment rather than a retiring allowance. It is our view that the employee would be taxable on the full amount of the award as salary or wages under subsection 5(1) of the Act, including the portion so withheld. However, the employee would be entitled to a deduction under paragraph 60(n) of the Act for that portion of the award which was remitted to the Receiver General for Canada as an overpayment of unemployment insurance benefits. Consequently, the entire amount paid would be subject to C.P.P. contributions, U.I. premiums and income tax deductions at source; however, the taxpayer may wish to request a reduction in the amount of income tax so withheld under subsection 153(1.1) of the Act.

Question No. 8

PREJUDGMENT AND POST-JUDGEMENT INTEREST

We understand that Revenue Canada's position has been that the prejudgment interest or pre-settlement interest on retiring allowances is not required to be included in income and is not reportable. However, post-judgement interest is taxable and must be reported on a T5 slip, although no deductions at source are required.

a) Is this still Revenue Canada's position?

b) Using two examples, explain what Revenue Canada means by prejudgment and post-judgement interest.

Department's Position

The term, prejudgment interest, refers to interest that relates to the period prior to the court order (or settlement) whereas post-judgment interest refers to interest computed from the date of the judgement or settlement.

The Department's position in respect of prejudgment or presettlement interest paid on an award or settlement for wrongful dismissal is currently under review. Interest payable in respect of any other type of retiring allowance would be taxable as interest as stated in paragraph 12 of Interpretation Bulletin IT-396R "Interest Income".

Question No.15

REIMBURSEMENT OF LEGAL COSTS

Awards or reimbursements of legal costs paid after 1985 with respect to the establishment of a right to or collection of a retiring allowance are not subject to source deductions. However they are included in income by virtue of paragraph 56(1)(l.1) of the Income Tax Act.

a) Is the employer required to report this money anywhere?

b) Does this money qualify as a retiring allowance for the purposes of a transfer into a RRSP?

Department's Position

a) The reimbursement of legal fees described in paragraph 56(1)(l.1) of the Act is not a payment described in subsection 153(1) of the Act nor is it an amount included in the definition of "remuneration" as found in subsection 100(1) of the Regulations. Accordingly, there is no statutory requirement for an employer to withhold tax in respect of such amounts or to report such amounts on an information slip.

b) Amounts included in income under paragraph 56(1)(l.1) of the Act are not amounts eligible to be transferred into an RRSP.

Author: A. Humenuk
File: 940987
Date: April 29, 1994