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: 1) Whether a settlement payment to an injured worker’s estate is included in income under paragraph 56(1)(v), with a corresponding deduction under subparagraph 110(1)(f)(ii). 2) Whether an employer is required to withhold source deductions (income tax, CPP and EI) from a settlement payment made pursuant to an agreement under section 63 of the WSIA under various scenarios.
Position: 1) Yes, provided the settlement payment constitutes compensation under a workers’ compensation law of Canada or a province in respect of an injury, a disability or death. Paragraph 56(1)(v) of the Act does not specify to whom the compensation must be paid. 2) No. As subsection 153(1) of the Act does not apply to compensation, an employer is not required to withhold source deductions (i.e., income tax, Canada Pension Plan contributions, and Employment Insurance premiums) from such payments. This position applies regardless of whether the compensation is paid to a current employee, a former employee, or a former employee’s estate..
Reasons: See below.
XXXXXXXXXX 2022-093933
B. Zabolotney
March 11, 2024
Dear XXXXXXXXXX:
Re: Settlement Payment – Workers’ Compensation
We are writing in response to your letter of December 23, 2021, concerning an employer’s potential settlement payment to a deceased employee’s estate. We apologize for the delay in responding.
You have indicated that the employer participates in the workers’ compensation program, as a Schedule 2 employer under the Ontario Workplace Safety and Insurance Act (“WSIA”). The employer is therefore responsible for the full cost of workplace injury claims filed by their workers. The adjudication of benefit entitlement is performed by the Workplace Safety and Insurance Board (“WSIB”).
In the situation you describe, a settlement is being contemplated for an employee who was injured while performing employment duties. We understand that the employee initially received certain benefits under the Ontario WSIA, but that these benefits were subsequently discontinued. We further understand that the employee objected to the discontinuance of benefits (a claim which was denied by the WSIB), appealed the WSIB’s decision, and thereafter retired from employment with the employer. However, before the employee’s appeal to the Workplace Safety and Insurance Appeals Tribunal (“WSIAT”) could be heard, the employee passed away.
The parties to the appeal are seeking to reach a settlement agreement under section 63 of the WSIA. You have asked whether payments received pursuant to such a settlement agreement are included in income under paragraph 56(1)(v) of the Income Tax Act (“Act”), with a corresponding deduction available under subparagraph 110(1)(f)(ii) of the Act, and whether this tax treatment may differ if the payment is received by a current employee (i.e., an employee who has not yet terminated employment with the employer), or a former employee who is not deceased. You have also asked whether such payments are subject to source deduction withholdings under the Act, and if the same withholding requirements apply irrespective of the recipient.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.
Compensation received under an employees’ or workers’ compensation law of Canada or a province in respect of an injury, a disability or death, is included in computing the taxpayer’s income for the year under paragraph 56(1)(v) of the Act. Generally, a corresponding deduction in computing taxable income for the year may then be claimed by the taxpayer under subparagraph 110(1)(f)(ii) of the Act. Although the compensation is not taxed, it may negatively impact a taxpayer's entitlement to certain income-tested benefits.
The term “compensation”, as it is used in paragraph 56(1)(v) and subparagraph 110(1)(f)(ii) of the Act, refers to the amount of an award, as adjudicated by a compensation board, which a taxpayer will receive as a result of an illness, injury or death in the performance of employment duties. It includes any such compensation to which entitlement is provided under the Government Employees Compensation Act or any employees’ or workers’ compensation law of Canada or a province.
Amounts received from an employer, pursuant to an agreement made under section 63 of the WSIA, appear to constitute compensation received under an employees’ or workers’ compensation law of Canada. Accordingly, such payments are required to be included in income under paragraph 56(1)(v) of the Act. A taxpayer is generally entitled to a corresponding deduction from income, for the amount so included, pursuant to subparagraph 110(1)(f)(ii) of the Act.
Once a particular payment is determined to be compensation received under an employees’ or workers’ compensation law of Canada, the fact that the taxpayer receiving the payment is employed, no longer employed, or deceased, is not a relevant factor in determining whether paragraph 56(1)(v) of the Act and the corresponding deduction pursuant to subparagraph 110(1)(f)(ii) of the Act applies. That is, paragraph 56(1)(v) does not specify to whom the compensation must be paid.
Paragraph 153(1)(a) of the Act, in combination with section 101 of the Income Tax Regulations (the “Regulations”), requires that every person paying salary, wages or other remuneration (with certain exceptions) must deduct or withhold income tax from the payment the amount determined in accordance with prescribed rules. Further, subsection 102(1) of the Regulations requires withholding on “remuneration”, which is defined in subsection 100(1) of the Regulations and includes a payment that is in respect of “salary or wages”. However, as compensation payments are not considered salary, wages, or other remuneration, they are not subject to the withholding of income tax, Canada Pension Plan contributions, and Employment Insurance premiums, irrespective of the recipient.
We trust that these comments will be of assistance to you.
Tom Baltkois, CPA, CGA
Acting Manager
Business and Employment Income Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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