12 February 1999 Internal T.I. 9832697 - ADMINISTRATIVE FEES

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: Are the ‘administration fees’ paid by an employer pursuant to paragraph 65(1.2)(b) of the Employment Standards Act (ESA) of Ontario considered a reimbursement of the employee's legal fees?

Position: No.

Reasons: The amount is a charge to the employer based on a percentage of the wages awarded to the employee. The amount is not based on legal services provided to the employee and is in the nature of a penalty to the employer. The former wording of the ESA used the term penalty, rather than administrative costs, regarding this amount. In addition, if the amount were a payment by the employer for administrative costs incurred, the amount would have to be apportioned between the employer and employee for their respective share of the costs.

		February 12, 1999

Toronto East Taxation Services	HEADQUARTERS
Business Window	David Shugar
		957-2133
Attention: Mrs. F. Fernandez
		983269

Administration Fees - Ontario Labour Board

We are writing in response to your enquiry of December 10, 1998 requesting our opinion on whether an amount payable by an employer pursuant to paragraph 65(1.2)(b) of the Employment Standards Act of Ontario (ESA), is taxable in the hands of the employee and, if so, is it deductible as though it is a legal fee.

In the situation you provided, the Ontario Labour Board ordered the employer to pay $XXXXXXXXXX to the Director in trust for the employee under paragraph 65(1.2)(a) of the ESA, and $XXXXXXXXXX to the Director in trust as administration fees under paragraph 65(1.2)(b) of the ESA.

Our comments

Reimbursements or awards for legal fees in connection with the collection or establishing a right to income from employment are included in income from an office or employment by virtue of paragraph 6(1)(j) of the Income Tax Act (the “Act”).

Paragraph 8(1)(b) of the Act provides for the deductibility of eligible legal expenses paid to collect or establish a right to salary or wages owed to the taxpayer by the employer or former employer.

Paragraph 56(1)(l.1) of the Act requires a taxpayer to include in computing income, amounts received as an award or reimbursement of legal expenses paid to collect or establish a right to a retiring allowance.

Paragraph 60(o.1) of the Act provides for the deductibility of eligible legal expenses paid after 1985 to collect or establish a right to a retiring allowance or pension benefits. Eligible legal expenses may be deducted in a taxation year to the extent they do not exceed the retiring allowances or pension benefits to which such expenses relate. The non-deductible portion of such expenses may be carried forward and deducted in any of the seven subsequent years, to the extent further related income arises.

Paragraph 6(1)(a) of the Act requires benefits of any kind to be included in the income of a taxpayer. In our view, in a situation where an employer makes payments to an employee, or to a third party in respect of the employee, the payment represents a benefit received by virtue of the employer-employee relationship and, accordingly, the amounts is taxable in the hands of the employee as employment income by virtue of paragraph 6(1)(a) of the Act.

Subsection 65(1.2) of the ESA, as amended in 1996, states:

(1.2) The employment standards officer may order the employer,

(a) to pay the wages owing to the employee to the Director in trust; and

(b) to pay an amount equal to the greater of $100 or 10% of the wages to the Director for administration costs.

Prior to 1996, the above provision was in former paragraph 65(1)(c) of the ESA and referred to a “penalty of 10% of the wages, or $100, whichever is greater...”. The principal change in the wording was to replace the reference to a “penalty” with a reference to “administrative costs”. Despite that change, the current paragraph 65(1.2)(b) still appears to be a penalty.

The term “administrative costs” is not defined in the ESA. The ordinary meaning of the term would not generally include the cost of legal services provided. As well, the ESA does not state whether those costs are in respect of services provided to the employee or the employer, or whether they are the general overhead costs of processing the case. Costs of disbursements that are related to providing legal services would be considered part of legal expenses.

Based on the above comments, in our view, the $XXXXXXXXXX is not a reimbursement of an employee’s legal fees. The amount is calculated as a percentage of the wages awarded rather than by reference to actual legal costs incurred by, or provided to, the employee, and is in the nature of a penalty to the employer. Therefore, in our view, the amount is not required, either in whole, or in part, to be included in the employee’s income under either paragraph 56(1)(l.1) or paragraph 6(1)(j) of the Act.

Regarding the possibility of including the $XXXXXXXXXX in income under paragraph 6(1)(a) of the Act, if the amount were intended to recover all or part of the administration costs of the Labour Board in handling the case, only the portion of the $XXXXXXXXXX attributable to the employee would be considered for inclusion at paragraph 6(1)(a). However, in our view, no part of the amount determined under paragraph 65(1.2)(b) of the ESA is a benefit to the employee since it is in the nature of a penalty to the employer.

Regarding your question about whether the amount could be claimed as a deduction under paragraphs 8(1)(b) or 60(o.1) as though it is a legal fee, we can provide the following general comments regarding legal expenses.

Legal expenses are considered to include amounts paid for services that are of a legal nature to the extent that they pertain to the domain of law. To the extent that they can be regarded as being for such services, fees paid to a party other than a firm of barristers and solicitors could be regarded as being "legal expenses" for the purposes of paragraphs 8(1)(b) and 60(o.1). However, to be deductible under either of these paragraphs, the amount must have been paid by the employee or included in the employee’s income by virtue of either or paragraphs 6(1)(j) or (a) or paragraph 56(1)(l.1), respectively.

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch