Principal Issues: An employee was injured in an automobile accident while working. In addition to WC benefits, the employee received top-up wages from her employer. The Workers' Compensation Board pursued a subrogated claim against the other driver's insurers and received an out-of-court settlement. Part of the proceeds was used to repay the employer for the top-up wages that were included in income in prior years. Is the employee entitled to a deduction for the amount repaid?

Position: Yes.

Reasons: Paragraph 8(1)(n) of the Act.

 		September 28, 2004

Ms. Dian Verluis	HEADQUARTERS
	Trust Accounts Division 	Terry Young, CA
	Revenue Collections Branch	613-952-1506
	A25 McArthur Road, 9th Floor
		2004-008748

Workers Compensation ("WC") - Repayment of Wage Top-up Payments

We are writing in response to your request of July 28, 2004, concerning a repayment to the employer of workers compensation top-up payments.

Background

? In 1999, XXXXXXXXXX (the "Taxpayer") was involved in an automobile accident while carrying out her duties of employment.

? She applied for and received WC benefits under the Workers' Compensation Act of Nova Scotia (the "WC Act"). These benefits were reported on T5007 slips for 1999 and 2000. The Taxpayer's employer made wage top-up payments totalling $XXXXXXXXXX and reported these amounts on T4 slips for 1999 and 2000.

? The Workers' Compensation Board of Nova Scotia (the "Board") pursued a subrogated claim against the insurers of the driver responsible for the accident and received an out-of-court settlement (the "Settlement") of $XXXXXXXXXX, which it divided up as follows:

Retained by the Board and applied against the
Taxpayer's claim $XXXXXXXXXX
Reimbursement to employer of wage top-up payments XXXXXXXXXX
Paid to the Taxpayer XXXXXXXXXX

The Taxpayer has requested that her 1999 and 2000 T1 Returns be amended to exclude the top-up payments that were repaid in 2002.

Our Comments

Pursuant to paragraph 8(1)(n) of the Income Tax Act (the "Act"), a taxpayer may claim a deduction against income from an office or employment for any required reimbursement of amounts paid to the taxpayer for a period in which the taxpayer did not perform the duties of the office or employment. This deduction is available for the taxation year in which the reimbursement is made. The deduction would be limited to amounts paid to the taxpayer for the period in which the taxpayer did not perform the duties of the office or employment and which were included in computing the taxpayer's income from an office or employment. In addition, the amount reimbursed cannot exceed the total amount received by the taxpayer over that period.

In our view, the $XXXXXXXXXX received by the Board in 2002 was a non-taxable payment for personal damages received on behalf of the Taxpayer. The Taxpayer used part of those funds to repay her employer for the wage top-up payments that were included in her employment income in 1999 and 2000. This repayment is deductible by the Taxpayer in 2002 under paragraph 8(1)(n) of the Act. There are no provisions in the Act that would permit the Taxpayer to reduce her income in 1999 and 2000 by the amount of the top-up payments received in those years and repaid in 2002.

We trust our comments are of assistance.

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch