2 November 1994 Internal T.I. 9420446 - REDIRECTION OF SALARY DURING A STRIKE

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 remuneration earned by a non-striking employee during a strike where the amount is paid to the union, a trustee or a charity

Position TAKEN:

question of fact but likely taxable to essential worker when paid to union, trustee or charity

Reasons FOR POSITION TAKEN:

While it might arguably be an employee benefit plan, the non-striking employee is most likely to be entitled to the earnings & thus any redirection to another source would cause it to be taxable when paid to the third party by reason of ss 56(2)

			November 2, 1994

	Source Deductions Division	Rulings Directorate
	André Bissonnette, Director 	A. Humenuk
			957-8953
	Attention: Susan Sinclair
	DO/TC Support Services Section
			942044

Salary Earned by Essential Workers During a Strike

We are replying to the memorandum from Jim Ivey of your division dated August 5, 1994 concerning the redistribution of funds otherwise payable to employees who continue to perform essential services during a strike.

Three situations were presented in which arrangements were made to pay the salary which would be earned by employees who would not be participating in an anticipated strike to another party, such as a union, a trustee or a charity.

In the first situation, which is the subject of the enquiry, the union and management negotiated an agreement whereby the union would supply a certain number of essential workers during the strike. The essential workers were to have the option of either receiving their regular pay or redirecting it to the union. The agreement specified that where the employee signed the appropriate disclaimer form, the employer would pay the gross amount of redirected salary to the union at the end of the strike. The union would then distribute the funds equally to all the striking workers, including both those who had performed duties of employment as an essential worker and those who had not. While the anticipated strike was averted, the employer wishes to know what source deductions would be required if similar circumstances were to arise in the future.

The second situation was similar to the first except that the arrangement between the union and the employer did not appear to provide the employees performing the essential services with an option to receive their pay in the regular manner. Our understanding of the agreement suggests that all salary earned by essential workers during the strike was paid into a trust for the benefit of the striking employees and that the essential workers were not required to sign any waiver in respect of the amount of salary forgone. In this situation, the employer was advised in 1990 by your division that source deductions were not required on the amounts contributed to the trust fund but that the amounts paid to the striking employees out of the trust upon the termination of the strike would be taxable as employment income. The opinion was also given that the amounts paid out of the trust were not subject to withholding under the Unemployment Insurance Act and the Canada Pension Plan.

In the third situation, non-striking workers, who were unable to participate in the strike because of their religious convictions, were permitted to redirect the salary earned during the strike to a charity. In this situation, the CPP and UI Coverage Section of your division determined that any amount redirected to a charity by the employees who chose not to participate in the strike was required to be included in the employee's income at the time the payment was earned and that UI premiums and CPP contributions were required as well.

Based on the apparent discrepancy between the two opinions previously given, we were asked:

whether the gross amount earned by an essential worker or non-striking employee which has been redirected to a union, trustee or charity is taxable as employment income in the hands of the individual who earned the income,

whether the amounts paid out of the fund created by the earnings of the essential workers to the striking members of the union upon the termination of the strike would be taxable to the members of the union when received and

whether withholding is required under the Canada Pension Plan and the Unemployment Insurance Act in respect of any of the above mentioned payments or distributions.

While each of the situations presented are similar in that salary which would ordinarily have been paid to an employee is paid to another person, there are also significant differences in the manner in which this is accomplished. Accordingly, each situation must be reviewed on its own and a determination made specific to that particular situation. The comments which follow are general in nature and may not apply in respect of any particular arrangement which may be made in the future. Where such an arrangement is seriously contemplated, we would be prepared to provide an advance income tax ruling in respect of the taxation issues. Details of how the parties concerned should proceed with such a request are described in Information Circular 70-6R2 and special release thereto.

Salary, wages and other remuneration are included in income in the year of receipt. However, where an employee has the option of receiving the salary or wages for the period worked and directs the employer to pay it to another source, be it a union, charity or another person, the amount will ordinarily be included in the employee's income by reason of subsection 56(2) of the Act even though the employee did not receive it.

Subsection 56(2) of the Act applies where the following three conditions are met:

(1) a payment must be made with the concurrence of the taxpayer;

(2) a payment must be for the benefit of the taxpayer or a benefit the taxpayer wished to confer on another person;

(3) the payment would have been included in the income of the taxpayer if it had been paid to the taxpayer directly.

In our view these conditions would likely be met in all three situations because it is extremely doubtful that the union would be able to redirect the salary earned by an employee to another party without the concurrence of that employee. Accordingly, we would expect the amounts paid to the union, trustee or charity to be included in the income of the essential worker in the year it is paid to the union, trustee or charity.

The response given by your division in the second situation might suggest that the arrangement was treated as an employee benefit plan as defined in subsection 248(1) of the Act. In order for such an arrangement to qualify as an employee benefit plan, it would be necessary to show that the essential worker was not entitled to any salary for the period worked and that the liability for contributions to the fund rested with the employer. It would be unusual indeed, if an employer was obligated to maintain a strike fund to support the employees during the period of a strike. However, without a review of all the relevant documentation concerning the arrangement, we cannot comment on the appropriateness of that opinion.

Where an employee has directed salary to be paid to a registered charity, the amount so directed would be considered to be a charitable gift as defined in subsection 118.1(1) made by the employee and the employee would be entitled to use that amount, subject to the limits contained in section 118.1 of the Act, in calculating the charitable donation tax credit for the year in which the salary was paid to the charity. However, no deduction would be available where the salary was redirected to the union. While a deduction is available for union dues, including a special assessment of dues to create or increase a strike fund (see Lucas v. The Queen (87 D.T.C. 5277)), it is our view that salary redirected to a union in the manner described in the first example could not be considered "dues" paid to maintain membership in a trade union or other employee association. To the extent that the amount is then paid by the union to the striking workers as strike pay it would not be taxable for the reasons given in the case of Fries v the Queen (90 DTC 6662).

The questions relating to the withholding requirement under the Canada Pension Plan and the Unemployment Insurance Act are best handled by the CPP and UI Programs Section of your division.

M. Bisson
Acting Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch