Principal Issues: [TaxInterpretations translation] Can compensation paid by a bank pursuant to the Canada Labour Code be considered an amount described in paragraph 56(1)(v) and subparagraph 110(1)(f)(ii) of the Income Tax Act? What are the administrative requirements?
Position: Yes to the first question if certain conditions are satisfied. For the administrative formalities, please refer to section 232 of the Income Tax Regulations.
Reasons: Benefits received by an employee pursuant to an employer's obligation under the Canada Labour Code to compensate for a work-related injury or illness are considered to be received under federal workers' compensation legislation. Section 239.1(2) of the Canada Labour Code has not been legislatively amended to require a federally regulated employer to pay compensation for occupational injuries at a rate equivalent to that provided under provincial legislation.
Mr. Francis Goulet
Laval Tax Services Office
3400 Jean-Béraud Avenue 2006-020861
Laval QC H2T 2X2 Lucie Allaire
(613) 952-5803
December 18, 2006Dear Sir,
Subject: Request for technical interpretation: Compensation plan for employees suffering from occupational injuries
This is further to your memorandum dated May 16, 2005, received by us on September 28, 2006, requesting confirmation of the Canada Revenue Agency's ("CRA") position as to whether payments made by a bank, a federally regulated employer, as benefits under a compensation plan, come within paragraph 56(1)(v) of the Income Tax Act (the "Act") and subparagraph 110(1)(f)(ii).
Unless otherwise indicated, all references herein to the Act are to the provisions of the Income Tax Act.
Facts
You attached to your memo a letter dated September 8, 2006, stating the following:
- A bank, a federally regulated employer (the "Employer"), wishes to establish a compensation plan for its Ontario resident employees who suffer work-related injuries or illnesses.
- Inclusion of the employer under Ontario's Workplace Safety and Insurance legislation is optional. However, it is subject to the Canada Labour Code (the "Code").
- In order to establish its compensation plan, the employer will use an intermediary, XXXXXXXXXX, a company specializing in the management of compensation plans for victims of occupational injuries, to manage and pay compensation to employees residing in Ontario.
Questions
Your letter contains the following two questions:
(1) Will the payments to be made by the bank as benefits under the compensation plan come within paragraph 56(1)(v) and subparagraph 110(1)(f)(ii)?
(2) What administrative procedures will be required in connection with the payment of those benefits?
Analysis
(1) Will the payments be subject to paragraph 56(1)(v) and subparagraph 110(1)(f)(ii)?
We have assumed that the compensation paid by the employer will not be calculated on the basis of the worker's salary, but rather at a rate equivalent to that provided for under the Workers' Compensation Act in force in the employee's province of residence pursuant to subsection 239.1(2) of the Code.
Section 239.1(2) of the Code provides that:
Every employer shall subscribe to a plan that provides an employee who is absent from work due to work-related illness or injury with wage replacement, payable at an equivalent rate to that provided for under the applicable workers’ compensation legislation in the employee’s province of permanent residence.
The Act does not provide a definition of the term "workers' compensation". However, the CRA - in paragraph 1 of Interpretation Bulletin IT-202R2 - defines such compensation as:
the amount of an award, as adjudicated by a compensation board, which a worker or his or her dependants will receive as a result of the worker having suffered illness, injury or death in the performance of his or her duties of employment and includes any such compensation to which entitlement is provided under the Government Employees Compensation Act or any employees' or workers' compensation Act or Ordinance of a province or territory of Canada.
For compensation to be considered subject to paragraph 56(1)(v) of the Act, it must not be governed by a contractual undertaking. We draw your attention to the following comment by the Federal Court of Appeal of Canada in John Suchon v. Her Majesty the Queen 1 regarding paragraph 56(1)(v) of the Act and subparagraph 110(1)(f)(ii) of the Act:
A payment made under a contractual arrangement, even one that includes an extra-statutory adjudication by a workers' compensation board or commission, is outside the scope of those provisions.
In addition, since employees reside in Ontario, the compensation paid must not exceed the compensation payable under Ontario's Workplace Safety and Insurance Act. If the employer guarantees the full amount of wages or a percentage that is greater than the percentage payable under Ontario's workers' compensation legislation, the amounts received by the employee in excess of the compensation payable under the provincial legislation are fully taxable. That excess would be considered employment income subject to deduction at source pursuant to subsection 153(1).
As determined in CRA Technical Interpretation 9506565, dated September 13, 1995, benefits received by an employee pursuant to an employer's obligation under the Code are considered to be received under a federal workers' compensation statute for the purposes of paragraph 56(1)(v) and subparagraph 110(1)(f)(ii).
Since there have been no legislative changes to section 239.1(2) of the Code since 1995, we believe the same conclusions apply. Subsection 167(1) of the Code sets out the definitions that apply to Part III of the Code, which includes Division XIII.1. Section 2 of the Code, which sets out all of the definitions that apply to the entire Code, specifies that a bank is a federal work, undertaking or business.
Compensation received under a workers' compensation act of Canada or of a province in respect of injury, disability or death must be included in computing the employee's income pursuant to paragraph 56(1)(v). That same allowance is deductible in computing the employee's taxable income pursuant to subparagraph 110(1)(f)(ii). No withholding under subsection 153(1) is required since the amounts referred to in paragraph 56(1)(v) do not constitute income received by way of an office or employment. In the course of our research, we became aware of the document entitled Bulletin Board dated April 26, 1996, submitted by the taxpayer's representative to the effect that third party payments arising from an employer's obligation pursuant to the Code would not be excluded from paragraph 56(1)(v). We confirm that the use of the administrative services of an intermediary does not change the above tax consequences.
(2) Administrative formalities
Pursuant to subsection 232(1) of the Income Tax Regulations ("ITR"), every person who pays an amount in respect of compensation described in subparagraph 110(1)(f)(ii) of the Act shall make an information return in prescribed form in respect of that payment. That prescribed form is the T5007 slip, which shows the total wage-loss benefits received by the recipient employees up to and including December 31, less any interest payments.
Also excluded from the T5007 are amounts coming within subsection 232(4) of the ITR, such as interest payments, compensation for non-financial loss, payments under a labour market reintegration program, medical expenses and lump-sum payments to survivors.
We hope you find these comments of assistance.
Best regards,
Phil Jolie
Business and Partnerships Division
Income Tax Rulings Directorate
ENDNOTES
1 2002 FCA 282, 2002 DTC 7151. That case has not been translated into French and only the English version is available