9 March 1993 External T.I. 9238035 F - Nature of Payments Made to Employees

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  XXXXXXXXXX

This is in reply to your letter of December 18,1992 in which you requested our views on the tax consequences of certain payments received by union members upon the termination of their employment.

You have outlined a situation in your letter where the above-noted company terminated the employment of a number of individuals when it ceased to carry on one of its business operations. Each of the individuals received an amount in lieu of notice pursuant to the collective agreement. With respect to these payments, the employer withheld income taxes and remitted the aggregate of the remainder to the union which paid the amount received to the employees. In addition, further amounts were paid to the employees. The source of funds has been described as being a settlement payable to the union on account of the loss of exclusive bargaining rights for the surrender of one of its bargaining units and for loss of jurisdiction over that unit. With respect to these payments, the employer also withheld income taxes and remitted the aggregate of the remainder to the union which paid the amount received to the employees.

It is our understanding that your concern is whether the latter type of payments can be regarded as being non-taxable damages.

Our Comments:

As discussed with you in our recent telephone conversation, we are unable to comment on completed transactions. In order to obtain the Department's position on the specific matter you have raised, you should contact your local District Taxation Office. We are, however, providing you with the following general comments which are not binding on the Department.

Our discussion below in respect of the nature of payments would include any income tax that has been withheld and remitted on account of the payees.

At the outset, we wish to provide you with general comments on amounts distributed from a union that is an exempt taxpayer pursuant to paragraph 149(1)(k) of the Income Tax Act (the Act). In this regard, a union, at the time of a distribution, may hold funds in trust for various purposes such as vacation pay trusts and training and may well have funds accumulated from union dues and tax exempt income that was earned. To the extent that any distribution to its members is covered by a specific provision in the Act, (e.g. an employee benefit plan or an employee trust), it will be taxed according to those provisions.

In the case of any other distribution which is made as a consequence of the fact that a company ceased to carry on a part of its business, it would seem possible that the amounts received by recipients in respect of the distribution might be regarded as being non-taxable. Of course the final determination in respect of such amounts could only be determined following a review of all the relevant facts and documentation. For the purposes of determining the nature of such payments made to union members or former union members, we are setting out indicia outlined on page 6073 of the Cranswick case (82 DTC 6075) (these indicia have also been included in paragraph 3 of Interpretation Bulletin IT-334R2 entitled "Miscellaneous Receipts") which may be useful in determining whether or not the payments are subject to tax:

(a)     The taxpayer had no enforceable claim to the payment;

(b)     There was no organized effort on the part of the taxpayer to receive the payment;

(c)     The payment was not sought after or solicited by the taxpayer in any manner;

(d)     The payment was not expected by the taxpayer, either specifically or customarily;

(e)     The payment had no foreseeable element of recurrence;

(f)     The payment was not a customary source of income to the taxpayer;

(g)     The payment was not in consideration for or in recognition of property, services or anything else provided or to be provided by the taxpayer; it was not earned by the taxpayer, either as a result of any activity or pursuit of gain carried on by the taxpayer or otherwise.

The above comments have been made on the basis that the ultimate source of the payments was the union. In the circumstances where an employer ceases to carry on a part of its business operation and, in respect of a settlement payable to the union, pays an amount to the union which, in turn, makes payments in connection with the settlement to the employees whose jobs were terminated, it seems to us, as explained below, that the above comments on distributions by a union are not relevant because the ultimate source of the payments is the employer. With respect to such a payment, we also wish to mention that the determination of whether it is subject to tax usually involves a consideration of whether it can be regarded as being a "retiring allowance" as defined in subsection 248(1) of the Income Tax Act (the Act). Although the tax consequences of a particular payment can only be determined following a review of all the relevant facts, the following comments have been made on the assumption that this is in fact the case. For your further information, we note that the Department's general position on retiring allowances is set out in Interpretation Bulletin IT-337R2 "Retiring Allowances".

As indicated in the preceding paragraph, where the ultimate source of the payments was the employer (notwithstanding that the payments were made by the union), this information indicates that the payments would likely not be regarded as a distribution made by the union. Rather, the amounts could be regarded as having been paid in respect of the terminated employees' rights under the related union agreement (e.g., the union contract may have included a term which precluded the employer from using outside contractors and the employer wished to proceed in that manner). In such circumstances, it also seems to us that it would be normal for the union to represent the employees and that the union would have a fiduciary responsibility to ensure that the related settlement was paid to those employees whose jobs were terminated. If this were to be the case, it would be our view that the payments in question would be considered to have been "received ... in respect of a loss of office or employment, as on account or in lieu of payment of, damages..." for the purposes of paragraph (b) of the definition of retiring allowance in subsection 248(1) of the Act with the result that they would be taxable under subparagraph 56(1)(a)(ii) of the Act.

As a further general comment, we note that the Supreme of Canada has interpreted the phrase "in respect of" in a broad manner. On page 5041 of the Nowegijick case (83 DTC 5041), the following comments were made regarding that phrase which is used in the definition of retiring allowance:

"The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters."

The foregoing comments represent our general views with respect to the subject matter of your letter. However, the facts of an actual situation may lead to different tax consequences.

We trust that our comments are of assistance to you.

Yours truly,

P.D. Fuoco for Director Business and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch