15 June 2010 External T.I. 2009-0350371E5 - Disbursement of Union Surplus to Members

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.

Principal Issues: Whether the Disbursement of surplus funds by a union to its members would be taxable to its members.

Position: Question of fact, but in this case, probably not.

Reasons: Likely that the Disbursement is not income from a source pursuant to paragraph 3(a) of the Act and the Supreme Court of Canada's decision in Fries v. The Queen, 90 DTC 6662. However, the deductibility of the Members' union dues under subparagraph 8(1)(i)(iv) or paragraph 8(5)(c) should be considered as well as the application of paragraph 6(1)(j) of the Act.

XXXXXXXXXX
							2009-035037
							Renee Sigouin
							(613) 957-2128

June 15, 2010

Dear XXXXXXXXXX :

Re: Disbursement of Union Surplus to Members

This is in response to your email correspondence dated December 3, 2009 concerning the taxability of a potential one-time disbursement of funds from a union to its members. Specifically, you have advised that XXXXXXXXXX (the "Union") was recently in negotiations on behalf of its members (the "Members"), and had increased its cash reserves through the liquidation of various assets in anticipation of a strike. We understand that a strike was averted such that there are now surplus cash reserves in the Union. A Member has put forward a motion to vote to disburse the surplus funds back to the Members in a one-time payment (the "Disbursement"). You have asked whether the Members would be subject to tax on their receipt of the Disbursement in the circumstances described above.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

Paragraph 3(a) of the Income Tax Act (the "Act") provides that the income of a taxpayer for a taxation year is the total of all amounts each of which is the taxpayer's income for the year (other than taxable capital gains from the disposition of property) from a source inside or outside Canada, including the taxpayer's income for the year from an office, employment, business or property.

In the decision of the Supreme Court of Canada in a case called Wally Fries v. The Queen, 90 DTC 6662, strike pay received by a union member was held not to be "income from a source". This is discussed briefly at paragraph 12 of Interpretation Bulletin IT-334R2, "Miscellaneous Receipts". Similarly, it is our view that a Disbursement made in the circumstances described above is unlikely to be "income from a source" and consequently, would not be taxable to the Members.

Notwithstanding the foregoing, we note that paragraph 6(1)(j) of the Act requires a taxpayer to include in computing his or her employment income amounts received in the year as a reimbursement in respect of any amount that would be deductible under subsection 8(1) of the Act (such as union dues). Paragraph 6(1)(j) of the Act does not require an income inclusion where the amount received as a reimbursement is taken into account in computing the taxpayer's deduction under subsection 8(1) for the year or a preceding taxation year.

Whether the Disbursement can reasonably be considered to be a reimbursement of the Members' union dues such that an income inclusion will arise under paragraph 6(1)(j) of the Act, is a question of fact. However, where the Disbursement is calculated without reference to each Member's annual dues and/or length of membership, we would generally not consider it to be a reimbursement of membership dues that would be taxable pursuant to this provision. However, if a full review of the facts suggests that a payment is, in fact, a reimbursement of union dues, the Union should complete a T4A Slip for each Member.

Finally, we wish to draw your attention to paragraph 8(5)(c) of the Act. As confirmed above, a taxpayer is permitted to deduct union dues under subparagraph 8(1)(i)(iv) of the Act to the extent that he or she has not been reimbursed and is not entitled to be reimbursed in respect thereof. However, paragraph 8(5)(c) of the Act states that notwithstanding subparagraph 8(1)(i)(iv), dues are not deductible to the extent that they are in effect levied for any other purpose not directly related to the ordinary operating expenses of the trade union. This provision could have application in various situations in which one could question the purpose of union dues levied. An example might be a levy that increases an existing surplus, all or a portion of which will, under a proposed plan, be returned to Members as superfluous funds.

If a full review of the facts suggests that the Disbursement is not a one-off nominal payment, consideration could be given to whether paragraph 8(5)(c) of the Act should apply to restrict the deduction otherwise available under subparagraph 8(1)(i)(iv) of the Act.

We trust that these comments have been of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch