6 October 1993 External T.I. 9311995 F - Prejudgment Interest on Employment 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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear XXXXXXXXXX

RE:  Prejudgment or Pre-settlement Interest in Respect of Employment Income

We are replying to your letter of April 22, 1993, concerning a payment which was made to an employee in respect of a classification grievance. We apologize for the delay in our response.

You state that the resolution of a particular grievance included a payment in respect of salary as well as an amount designated as interest calculated with reference to that salary. The XXXXXXXXXX as employer, included the additional salary as well as the interest portion on the employee's T4 supplementary slip as additional remuneration. The employee disagrees that the amount is taxable. As a result, you have asked whether this interest is taxable and what responsibility the XXXXXXXXXX bears for reporting it on an information slip.

We are unable to confirm the tax consequences resulting from a specific transaction without a review of all the relevant documentation and facts relating to the particular case. If you would like assistance in determining the appropriate tax reporting in the specific case at hand, you should submit a copy of the original grievance and the court order or settlement agreement to your local district taxation office for their consideration and reply. We offer the following general comments concerning amounts designated as interest which are calculated in respect of an award or settlement which is itself considered employment income.

The Department's position on interest awards as part of the settlement of a dispute is set out in paragraph 12 of Interpretation Bulletin IT-396R "Interest Income". Where an award or settlement is augmented by an amount which is stated to be interest, such amount will generally constitute interest and will be included in income as interest. This position includes the situation where an amount of interest is awarded or agreed upon in respect of salary which has been under dispute.

The taxation of interest awarded in respect of employment income as interest income was affirmed in the case of Miller v the Queen (85 DTC 5354) where the court found that the amount designated as interest in respect of a retroactive award of salary was truly interest and as such, was taxable under paragraph 12(1)(c) of the Income Tax Act. Accordingly it is our view that an amount which can be characterized as "interest" and which is calculated in respect of an award or settlement of salary or wages will be taxable under paragraph 12(1)(c) of the Act.

With respect to the issue of the XXXXXXXXXX responsibility for reporting the interest portion of the settlement on an information slip, we can advise you that interest income is generally reported on a T5 supplementary slip. If you wish further assistance in the preparation of such a slip, you may wish to contact the Source Deductions section of your local district office.

We trust our comments will be of assistance to you.

Yours truly,

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