14 January 2000 Internal T.I. 9931297 - PAY EQUITY - INTEREST 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.

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: Whether interest on pay equity payments is taxable.

Position: Yes, it is taxable under paragraph 12(1)(c) of the Act for the year payment is received.

Reasons: See 9421464, 9727105, 942146a, 9426687, 9316439, 9203975, 73911, 9018736, 52830, 701231A.

		January 14, 2000

	Neil Moores   	HEADQUARTERS
	International Tax Directorate	G. Moore
	344 Slater, 5th Floor      	952-1506
		1999-001285

Pay Equity Payments - Interest Portion

We are writing in reply to your correspondence of November 29, 1999, in which you asked for our opinion concerning whether the interest portion of pay equity payments is taxable.

You are asking whether the interest portion of the pay equity payments will be treated for income tax purposes as interest for purposes of paragraph 12(1)(c) of the Income Tax Act (the "Act"). Also, you are asking whether the interest would be reported in 1999 as the settlement was reached in that year.

You also refer to paragraph 12 of Interpretation Bulletin IT-396R, Interest Income, dated May 29, 1984, and in particular to the statement "it is immaterial that the amount owing was not determinable until a later date because once the right to receive damages has been established, that right exists from the time at which the injury giving rise to those damages occurred." Your interpretation of this statement is that the interest applicable to a particular year is taxable in that particular year and therefore, the pay equity interest would be taxable in the year to which it applies.

You refer to the court case of Brenda Billingham v. the Queen, 96 DTC 6075, in which the Court decided that a portion of the interest was punitive and thus was a windfall gain and tax exempt. You are asking whether the pay equity interest portion would be considered a tax exempt windfall since the payments are being made as a result of a court decision involuntarily imposed on the federal government. You are asking whether this court case is relevant to the interest on the pay equity payments.

Lastly, you are asking if the interest qualifies as earned income for registered retirement savings plan purposes and if so, whether it qualifies as earned income in the year accrued, reported or paid.

Our Comments

As we understand it, on October 29, 1999, officials of Treasury Board Secretariat and the Public Service Alliance of Canada reached an agreement on the implementation of the Canadian Human Rights Tribunal Ruling of July 29, 1998. The total period covered by the Pay Equity Agreement is between March 8, 1985, and the present. Interest will be applicable to 90% of the total pay equity adjustment and will be calculated semi-annually on 90% of the total pay equity adjustment owing as of March 31 and September 30 of each year up to the date of the ultimate payment of the pay equity adjustment on a fiscal year basis.

As you know, amounts received on account, or in lieu, of interest are included in income under paragraph 12(1)(c) of the Act. Interest income is taxable when received or receivable depending on the method regularly followed by the taxpayer, subject to the specific overriding rules in subsections 12(3) and 12(4) of the Act. In this case, interest on the pay equity adjustment is taxable under paragraph 12(1)(c) of the Act as interest income and is required to be reported as interest income of the recipient for the year in which payment is received. Pursuant to the definition of "earned income" in subsection 146(1) of the Act, interest income that is taxable under paragraph 12(1)(c) of the Act does not form part of "earned income" for purposes of calculating the registered retirement savings plan contribution limit. We have attached an information package prepared by the Client Services Directorate, Head Office, which also indicates that such interest is taxable in the year received.

You have referred to paragraph 12 of IT-396R and in particular to the statement "it is immaterial that the amount owing was not determinable until a later date because once the right to receive damages has been established, that right exists from the time at which the injury giving rise to those damages occurred." Your interpretation of this statement is that the interest applicable to a particular year is taxable in that particular year and therefore, the pay equity interest would be taxable in the year to which it applies. We do not agree with your interpretation. In our view, that statement in paragraph 12 of the bulletin should be read in the context of the previous statement which reads "it follows that interest does not arise unless there is an amount due...". We do not interpret these statements to mean that the interest should be reported in the year to which it applies. Paragraph 12(1)(c) of the Act is quite clear in that interest is taxable when received or receivable, depending on the method regularly followed.

With respect to the case of Brenda Bellingham v. the Queen, 96 DTC 6075, the Federal Court of Appeal found that, although ordinary interest, payable as compensation for the use of money during the delay in settlement, is taxable as interest, additional interest payable under the Alberta Expropriation Act is punitive in nature and not intended as compensation for the use of money. As a result, the Court held that such additional interest was not truly interest or compensation for the land thus taken and thus, was not taxable to the recipient, either as interest or as part of the proceeds of disposition. In our view, the judgment in this court case with respect to additional interest is not applicable to interest on pay equity payments and if anything, this decision seems to support our position that ordinary interest, payable as compensation for the use of money during the delay in settlement, is taxable as interest.

Finally, it should be pointed out that it is the Agency's position that prejudgment or pre-settlement interest in respect of damages for personal injury, death, wrongful dismissal and retroactive workers' compensation awards are treated as non-taxable. As the pay equity payments are not damages for personal injury or wrongful dismissal, the interest on pay equity payments is taxable as interest income pursuant to paragraph 12(1)(c) of the Act for the year payment is received.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

J. Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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