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. What is the source of income for a lump-sum payment that arose as a result of a decision from the XXXXXXXXXX ?
2. How much should be withheld from the lump-sum payment?
Position: 1. The lump-sum payment contained an amount for lost wages and benefits and an amount for interest. The source of income for the lost wages and benefits would be employment income as the individual was reinstated. The source of income for the interest payment would be income from property.
2. The amount to be deducted or withheld by the employer from such a payment is the tax that may reasonably be expected to be payable under the Act by the employee from all remuneration that may reasonably be expected to be paid by the employer in that taxation year.
Reasons: 1. Paragraph 10 of IT-337R4 states that the amount received on account damages will be employment income if the employee retains his or her employment or is reinstated. The interest would be treated as income from property as it would be included in income pursuant to paragraph 12(1)(c).
2. Section 106 of the Regulations provides the rules for withholding deductions where an employer makes a payment of remuneration to an employee for a pay period in an amount that is greater than any amount provided for in Schedule I.
XXXXXXXXXX 2011-040742
M. Gauthier
(613) 948-1143
Attention: XXXXXXXXXX
December 9, 2011
Dear XXXXXXXXXX ,
Re: Lump-sum settlement payment
We are writing in reply to your fax of May 19, 2011 in which you asked for our opinion for determining the source of income and the source deductions for a lump-sum settlement payment that was ordered payable as a result of a decision from the XXXXXXXXXX .
In your letter, you discussed a situation where the XXXXXXXXXX ordered that an individual be reinstated and be compensated for the equivalent of lost wages and benefits plus an amount for interest. As a result, the individual will receive a one-time lump sum payment of $XXXXXXXXXX consisting of $XXXXXXXXXX for lost wages and benefits and $XXXXXXXXXX as interest.
Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the "Act") as amended.
Our comments:
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.
Source of income.
As stated in paragraphs 9 of IT-337R4 Retiring Allowances, "compensation received by an individual from the individual's employer or former employer on account of damages may be employment income, a retiring allowance, non-taxable damages, or a combination thereof." If the employee retains his or her employment or is reinstated, Paragraph 10 of IT-337R4 states that the amount received on account of damages will be taxable as employment income. Due to the fact that the individual is reinstated, we are of the view that in the situation you described, the part of the lump-sum amount that is in respect of lost wages and benefits would be taxable as employment income.
The interest component of the lump-sum payment must be included in income either when it is received or when it is receivable by virtue of paragraph 12(1)(c). The interest received would therefore be treated as income from a source that is property.
Withholding and Information Reporting:
Paragraph 153(1)(a) generally provides that every person paying salary, wages or other remuneration shall deduct or withhold an amount in accordance with prescribed rules which are found in Part I and Schedule I of the Income Tax Regulations (the "Regulations").
An amount paid in respect of employment income meets the definition of "remuneration" found in Section 100 of the Regulations. The prescribed rules for withholding tax on remuneration are found in section 102 of the Regulations. However, in the situation you described, the $XXXXXXXXXX payment exceeds any applicable range of remuneration established by Schedule I of the Regulations.
In such cases, section 106 of the Regulations will apply to determine the amount of source deductions. Section 106 of the Regulations states that the amount to be deducted or withheld by the employer from such a payment is the tax that may reasonably be expected to be payable under the Act by the employee with respect of the aggregate of all remuneration that may reasonably be expected to be paid by the employer to the employee in respect of that taxation year.
A T4, Statement of Remuneration Paid, would be required for the amount paid in respect of salary, wages or other remuneration. The interest component of the lump-sum payment would not be subject to withholdings but a T5, Statement of Investment Income, would be required.
In order to assist you in determining the amount that should be withheld from the payment, you may consider using a manual method to calculate the income tax deductions. For more information, see the instructions in the section called "Step-by-step calculation of tax deductions" in Part A of the publication T4032, Payroll Deductions Tables available on the CRA website at
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/pyrll/t4032/menu-eng.html.
We hope this information is of assistance to you.
Yours truly,
Guy Goulet CA, M. Fisc.
Manager
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Canada Revenue Agency
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