Principal Issues: [TaxInterpretations translation] Can amounts including retroactive salary adjustments, compensation and interest paid to the XXXXXXXXXX to achieve pay equity be considered a qualifying amount for the purposes of that definition in subsection 110.2(1) of the Income Tax Act?
Position: No.
Reasons: Those amounts are not received pursuant to an order or judgment of a competent tribunal, an arbitration award or a contract by which the payor and the individual terminate a legal proceeding as they result from agreements reached in the process of out-of-court negotiations for pay equity and the establishment or renewal of collective agreements.
2007-026108 XXXXXXXXXX Lucie Allaire, Advocate, CGA, D. Fisc. February 25, 2008
Dear Madam,
Subject: Retroactive lump sum payments
This is in response to your letter of November 13, 2007, requesting our opinion on the requirement to issue Form T1198 "Statement of Qualifying Retroactive Lump-Sum Payment" in respect of amounts paid in XXXXXXXXXX to XXXXXXXXXX.
Following the filing of a grievance, an arbitration award was rendered on XXXXXXXXXX partially upholding the union's case and granting pay increases to the XXXXXXXXXX. As a result of that decision, the union representing the XXXXXXXXXX employees agreed to a settlement to establish retroactive salary adjustments, a compensatory allowance and related interest.
In order to achieve pay parity for the XXXXXXXXXX, the negotiating parties applied the agreements reached for the XXXXXXXXXX in a similar manner. Those amounts, including retroactive wage adjustments, compensatory allowance and interest, were the result of agreements reached between the union parties and the XXXXXXXXXX in the context of out-of-court negotiations and the establishment or renewal of collective agreements.
Our Comments
Subsection 110.2(2) of the Income Tax Act (the "Act") provides for a deduction in computing taxable income for certain retroactive salary adjustment payments. To qualify, the payments must satisfy the definition of "qualifying amount" in subsection 110.2(1) of the Act. That definition requires, inter alia, that the amount be received pursuant to an order or judgment of a competent tribunal, an arbitration award or a contract by which the payor and the individual terminate a legal proceeding.
In our view, the payment of the amounts to the XXXXXXXXXX in this case is not a "qualifying amount" for the purposes of subsection 110.2(2) of the Act as it is not received in fulfillment of one of the three conditions noted above. The agreements reached, entitling the XXXXXXXXXX described above to retroactive wage adjustments, were the result of negotiations and arose from the establishment or renewal of collective agreements. The agreements reached here to achieve pay equity are based on other agreements resulting from an arbitral award, XXXXXXXXXX.
Consequently, we are of the view that a T1198 form does not need to be completed in this case.
These comments are not advance income tax rulings and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, are not binding.
Best regards,
Randy Hewlett
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.