In Year 1, pending the employee’s application for worker’s compensation from the CSST for a disability (which ceased later in the year), the employer paid the employee salary insurance benefits of $40,000, with the employee receiving $10,000 in salary in Year 1 outside the period of disability.
In Year 2, the CSST paid $30,000 in benefits for Year 1 and issued a T5007 slip to the employee for that amount. The employer reversed the accounting entries for the $40,000 in salary insurance benefits paid in Year 1 and, as required by the collective agreement, paid the employee the difference between the amount received from the CSST and the salary that the employee would normally have received had he been at work. The employee also received his regular salary of $65,000.
CRA stated regarding Year 1:
[W]e will assume that the $40,000 is paid to the employee under an income maintenance insurance plan as provided in paragraph 6(1)(f). Therefore, the amount received by the employee should be reported on a T4A slip in Box 28.
Regarding Year 2:
[A]n employer who continues to pay an employee’s salary before and after a workers’ compensation board claim is decided is not allowed to retroactively reduce earnings in the current year, or amend a previous-year T4 slip, and call the earnings workers’ compensation benefits. As a result, the employee must report, in the year it is received, the salary received before and after a workers’ compensation board claim is decided. The fact that the amount was reported on a T4A does not change the tax treatment since the term "remuneration" includes all amounts received by the taxpayer under subsection 5(1) to which paragraph 6(1)(f) is ancillary. Instead of amending the T4A for Year 1 regarding the amount of salary insurance, you should file a T4 for Year 2 and enter the same amount previously reported, possibly $40,000 in the "Other Information" Box and code 077. This will allow the employee to enter this amount on line 229 of his or her income tax return and obtain the deduction provided for in paragraph 8(1)(n).
… The amount received by the employee from the CSST, reported on the T5007 slip, is taxable pursuant to paragraph 56(1)(v) … .