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:
1)Should the amount recovered by a Workers' Compensation Board from a third party by virtue of the Board being subrogated to the worker's rights in respect of a chose of action arising from the work-related personal injury of the worker purusant to the provisions of the applicable workers' compensation legislation be deducted from the amount of compensation reported on the T5007?
2)General comments regarding the effect of subrogation or assignment of rights by a recipient of social assistance or workers compensation.
Position TAKEN:
1)In the case under review the Board received the third party payment pursuant to its statutory authority under the applicable legislation in its own right and this amount is unrelated to any compensation to which the recipient of workers' compensation is entitled under the compensation legislation. Accordingly, there would be no offset of the third party payment against workers' compensation and in the case under review the recipient's T5007 should not be adjusted.
2)This will be a question of fact as the tax treatment will depend on the circumstances surrounding the assignment or subrogation of the payments and the applicable legislation in effect.
Reasons FOR POSITION TAKEN:
Previous correspondence positions on similar payments including 931070, 4-0484,
October 6, 1995
Assessment of Returns Directorate HEADQUARTERS
T2/T3 Programs Division D. Zion
W. S. Hume (613) 957-8953
Director
Attention: Lynne Webb
951439
XXXXXXXXXX
This is in reply to your memorandum of May 26, 1995 in which you request our opinion regarding whether or not the Department has the authority to require the issuers of the Return of Benefits T5007, to reduce the amount of T5007 benefits reported by amounts recovered through assignment or subrogation. Your enquiry is the result of a recent request by XXXXXXXXXX to have his 1994 T5007 from the Alberta Workers Compensation Board (WCB) amended and his 1994 Tax return adjusted accordingly. We apologize for the delay in our response.
You have asked us to review XXXXXXXXXX situation to determine if his original 1994 T5007 is correct in that it includes the lump sum pension award he received from the Alberta WCB in 1994. In addition, we have been requested to provide our comments regarding the legal ramifications of subrogation or assignment of rights that may affect this and similar determinations.
XXXXXXXXXX situation, as we understand it, is as follows:
1)In 1989 XXXXXXXXXX was involved in a work-related injury, applied for and subsequently received workers' compensation benefits in respect of this injury.
2)Pursuant to subsection 17(1) of the Alberta Workers Compensation Act (WCA), as a result of XXXXXXXXXX applying for and accepting workers'compensation benefits, the Alberta WCB is subrogated to XXXXXXXXXX rights to an action against a third party in respect of the personal injury.
3)Pursuant to its right under section 17(1) of the Alberta WCA the Alberta WCB pursued a personal injury action against the negligent third party. In XXXXXXXXXX the action was settled and monies were received by the WCB from the third party insurer.
4) XXXXXXXXXX.
Pursuant to section 42 of the WCA the WCB may commute to a lump sum periodic pension payments due to a worker. Accordingly, the WCB authorized a lump sum payment to XXXXXXXXXX.
We will proceed by way of general comments regarding our position in respect of the reporting requirements of payers of social assistance or workers' compensation in the event of the subrogation or assignment of rights to income which could arise. We will then more specifically address XXXXXXXXXX situation in light of our discussion.
You have specifically enquired as to whether Revenue Canada would have the authority, pursuant to Regulation 232 and 233 of the Income Tax Act (the "Act"), to require WCB's and social service agencies to reduce T5007's for recoveries that they have received on behalf of their clients. Regulations 232 and 233 of the Act were introduced to require any person making a payment in respect of workers' compensation or social assistance respectively, with some exceptions, to make an information return in prescribed form in respect of the payment. Where a worker's compensation board, or a similar body adjudicates a claim for compensation and determines the amount of the award then the board or body would also be responsible for making an information return in prescribed form in respect of the amount of the award.
A significant factor in determining whether an amount should be reported as a payment in respect of an amount described by subparagraph 110(1)(f)(ii) or paragraph 56(1)(u) of the Act is whether the payer of the benefit is collecting the amount from the third party or organizations on its own behalf or on behalf of the individual in receipt of the benefit payments. Where the rights of the individual are subrogated to the payer by law, the amounts collected by the payer in respect of these rights would belong to the payer and accordingly the payments would lose their original identity.
A number of other situations arise in respect to the assignment of certain payments to government agencies, boards or social services agencies. We would hesitate to provide a definitive response as the tax consequences in a given case would depend on the circumstances surrounding the assignment of the payments. For instance, in situations involving spousal support it would be necessary to know the basis on which the application for support was made, the terms of the court order authorizing the payments and the persons who were actually party to the arrangements. For example, in Alberta, an individual's rights to income support under a maintenance or alimony agreement are subrogated to the province for the period of time during which the recipient receives payments under the Social Development Act of that province (the SDA). It is not necessary for an individual in Alberta to assign his or her rights under an alimony or maintenance agreement in order for the amount received by the individual to "lose its identity" as alimony or income support from a spouse or former spouse because subsections 14(1) and (2) of the SDA transfers the right to those payments (other than any current payments which the payer makes directly to the individual receiving social assistance) to the province for any period during which social assistance is given. The situation described above can be distinguished from those situations where a province collects alimony or maintenance for the intended recipient under a program such as the Maintenance Enforcement Program of Alberta. An amount collected by the province on behalf of a recipient will still be deductible to the payer and included in the recipient's income if the amount would have been deductible by the payer and included in the recipient's income if paid directly to the recipient by reason of subsection 56(2) of the Act. Under these circumstances the amount would not be included on the recipient's T5007 as a social assistance payment.
In the case of an assignment of UI benefits or CPP disability payments, it is our understanding that the determination of the amount of workers'compensation or social assistance to which the recipient is entitled is calculated in accordance with certain provisions within the legislation which take into account the total amount of other sources of income such as UI benefits or CPP disability payments to which the recipient is entitled. Accordingly, under this scenario it is our view that the organization to whom the assignment has been made is acting as agent for the recipient and that the payments do not lose their original identity. The organization in receipt of the assignment should not include the amount of these particular types of payments in the amount reported on the T5007 as they could not be considered to be part of a compensation paid pursuant to 110(1)(f)(ii) or social assistance payment pursuant to 56(1)(u) of the Act. As you have noted in your memorandum, these particular types of payments would be reported on the applicable information return such as a T4U or CPP slip.
Generally, under provincial workers' compensation legislation, the compensation to which a worker is entitled takes the place of the worker's right of action, and the worker would not normally be able to sue the employer in court for damages for a work-related injury. The right to compensation under the legislation may not be assigned without the applicable Workers' Compensation Board's (Board) approval, and it may not be waived or attached. In the event that the worker receives compensation, the Board is subrogated; that is to say, succeeds to the rights of the worker and/or his dependants. For instance in Alberta, there is subrogation by the Board of the worker's rights in respect of a chose of action arising from the work-related personal injury of the worker pursuant to section 17 of the Alberta WCA. Section 17 further outlines the WCB's rights and obligations pursuant to this transfer of the workers' rights.
In the case of XXXXXXXXXX the issue is whether the Alberta WCB is collecting the amount from the third party insurer on its own behalf or on behalf of XXXXXXXXXX is of the view that these settlement funds were collected on his behalf and accordingly are a damage settlement and cannot be considered a compensation payment from the WCB. Given the statutory subrogation by the WCB of the rights of XXXXXXXXXX upon his acceptance of compensation, we are of the opinion that the amounts received by the WCB from the third party insurer were received by the WCB in their own right and essentially unrelated to any compensation to which he was entitled pursuant to the WCA. Subsection 17(5) of the Alberta WCA merely contains provisions regarding the disbursement of any funds received by the WCB as a result of the subrogated rights. Accordingly, we are of the view that the full amount of the lump sum pension award which XXXXXXXXXX received in 1994 should be included as compensation on his 1994 T5007.
We trust that our comments have been of assistance.
B.W. Dath
Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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