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 a payment made by an employer in settlement of grievances for failure to follow proper procedures is taxable.
Position: Requires a review of the grievances and settlement agreement to determine the purpose of the payment, but most likely taxable as employment income.
Reasons: Jurisprudence has consistently viewed amounts that "arose clearly and unequivocally by virtue of the contract of employment and not as a result of some separate agreement or from motivations extraneous to the Collective Agreement" as employment income.
September 10, 2010
HEADQUARTERS HEADQUARTERS
Legislative Policy Directorate Income Tax Rulings
Directorate
Attention: Linda Deschatelets Rita Ferguson
519- 645-5261
2010-037383
Payment in Settlement of Grievances
We are writing in response to your request for a Technical Interpretation on the matter of a payment made to settle a number of grievances.
Your file involves a number of employees (the "Employees") of XXXXXXXXXX (the "Employer") who have received settlement payments (the "Settlement") as the result of an agreement between the Employer and XXXXXXXXXX , the Employees' union (the "Union"). Although no documentation was provided to us, you have provided a brief summary of the situation. The agreement was made to resolve a large number of grievances that had been filed by the Union against the Employer when it failed to follow proper procedures during XXXXXXXXXX . The Employer began assessing processes and procedures at the XXXXXXXXXX without the involvement of the Union, even though this was a requirement under the terms of the collective agreement. The grievances were presented to an arbitrator and the settlement agreement ensued. A lump sum of $XXXXXXXXXX was paid to the local Union for distribution to the Employees. Although you are not aware of how the amount was arrived at, you have advised that at no time did any worker lose wages or time off the job. The amount paid to each of the Employees was reported on T4 slips and income tax was deducted.
The tax treatment of an amount received as an arbitration or settlement award is dependent on the facts in each particular case. A settlement award may be treated as either a capital or income receipt. If it is determined that a settlement award is a capital receipt, such receipt may be considered as proceeds of disposition of a capital asset to which the amount relates or as compensation for the loss or sterilization of a capital asset. It does not appear from the facts presented that there was a disposition or loss of a capital asset in this scenario. If it is determined that a settlement award is an income receipt, such receipt may be included in the calculation of income for tax purposes as income from an office or employment, as income from other sources, or as a non-taxable receipt.
A settlement award or any other amounts received on account of damages suffered in respect of a loss of employment are specifically included in the definition of "retiring allowance" in subsection 248(1) of the Income Tax Act (the "Act") and consequently included in income by subparagraph 56(1)(a)(ii). We understand that in this situation, there was no loss of employment for any of the affected Employees, such that characterization of the Settlement as a retiring allowance would not be appropriate. The tax implications of some other types of damages received are set out in Interpretation Bulletin IT-365R2 "Damages, Settlements and Similar Receipts". All amounts received as damages for personal (that is, physical or mental) injury are considered non-taxable receipts. It should be noted that in the case of Vincent v MNR [1988] 2 CTC 2075 (TCC) the compensation received by the taxpayer from the employer for breach of the collective agreement was held to be income from employment, notwithstanding the taxpayer's claim the compensation was received for personal injury for the loss of amenities he sustained as a result of the employer's breach. Where a complaint involving a human rights violation by an employer is settled out of court, a reasonable amount in respect of general damages would be considered a non-taxable receipt. It does not appear to us from the summary provided that any of the foregoing types of injuries exist in the described situation.
Paragraph 6(1)(a) of the Act includes in a taxpayer's income from an office or employment "the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment", except any benefit specifically excluded by subparagraphs 6(1)(a)(i) to (v), none of which apply here. It is well established that the phrase "in respect of, in the course of, or by virtue of an office or employment" means that there need only be a small connection between a benefit and the employment in order to trigger the operation of paragraph 6(1)(a). In a number of situations where "damages" have been received as the result of grievances filed against employers the courts have found such amounts to be benefits taxable under paragraph 6(1)(a) of the Act.
For example, in the case of Norman v. Minister of National Revenue [1987] DTC 556 (TCC) an employee received a $5,000 payment from his employer to settle a grievance which was launched when the employee failed to get a promotion he sought. The terms of the settlement included wording to the effect that the settlement was not indicative of any wrongdoing by either party, and that the settlement was "aimed at fostering harmonious labour relations and a good working environment in the interests of all concerned". Although the employee described the amount as damages, the Court found that it was a taxable benefit in respect of employment.
Also relevant is the opinion provided in Technical Interpretation E 9605998. It was our view that an amount received by an employee as compensation for the loss of his right to pursue his classification grievance was taxable under paragraph 6(1)(a) of the Act since there was a causal relationship between the payment and the contract of employment.
It is important to note that the words used in a settlement agreement to label a settlement payment may not always reflect the actual character or reason for the payment. Also, where payments are made to settle a dispute without the dispute being fully addressed, the underlying grievance will still be considered in determining the purpose of the payment; and such a payment will not generally be considered a capital receipt for the extinguishment of the right to grieve or proceed with a lawsuit. In addition, if there is any indication that there may be more than one purpose for a settlement, a reasonable attempt must be made to allocate amounts as between each purpose if the tax consequences will vary.
It is a question of fact whether the Settlement in your file constitutes a taxable employment benefit to the Employees, however, based on the limited facts available, this appears most likely to be the case.
We trust that these comments will be of assistance.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. 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 the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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