Principal Issues: [TaxInterpretations translation] What tax treatment should be accorded to amounts received by members of a trade union in XXXXXXXXXX in connection with the termination and dissolution of the trade union?
Position: According to the facts provided, part of the amounts received by a member in XXXXXXXXXX is in repayment of its union contributions paid in XXXXXXXXXX. Consequently, the union contributions repaid in XXXXXXXXXX are not deductible. In our view, the excess of the amounts received by this member over the individual's contributions for the year constitutes proceeds of disposition of the individual's rights as a member of the union. The member therefore realizes a capital gain.
Reasons: Application of paragraph 8(1)(i) of the Act for the part of the sums received from the union that covers the contributions made by the members in XXXXXXXXXX. For the excess part of the sums received, the member has, in the context of the cessation of activities and the dissolution of the union, rights as a member (right to vote, to be represented).
December 10, 2004
XXXXXXXXXX Headquarters Collections Division Danielle Bouffard XXXXXXXXXX Tax Services Office (613) 957-8953 2004-008234
Reimbursement of union dues
This is further to your fax of July 7, 2004 requesting our opinion on the tax treatment of a payment made by a trade union to its members in connection with the cessation of its operations. We have taken into account the additional information you sent us by fax on October 7, 2004. We apologize for the delay in responding to your request.
Situation
Our understanding of the facts is as follows:
XXXXXXXXXX. According to information obtained from the Treasurer of the Union, the Board of Directors decided in a meeting to distribute the remaining funds to the members at the end of the Union's activities. In XXXXXXXXXX, the Union notified its members by letter that it was closing its books as of XXXXXXXXXX. The letter also stated that the money the Union was paying to them was an overpayment of dues.
The amounts received in XXXXXXXXXX by each of the members were calculated according to their seniority resulting in amounts varying from XXXXXXXXXX dollars. The Union executive recommended that members add the amount received to their income and advised them that no tax deductions had been made. The notice of dissolution of the Union was dated XXXXXXXXXX with the Registraire des enterprises. The Union had been constituted under the Professional Syndicates Act (R.S.Q., chapter S-40).
Question
What tax treatment should be accorded to the amounts paid by the Union to each of its members in XXXXXXXXXX?
Our Comments
Paragraph 6(1)(j) of the Income Tax Act (the "Act") requires a taxpayer to include in income from an office or employment for a taxation year any amounts received by the taxpayer in the year as an award or reimbursement in respect of an amount that would be deductible under subsection 8(1). The taxpayer must include those amounts in income to the extent that they were not taken into account in computing an amount deducted under subsection 8(1) for the year or a preceding taxation year. Paragraph 8(1)(i) provides that a taxpayer may deduct in computing employment income certain expenses paid in the year, including, inter alia, dues required to maintain membership in a trade union, to the extent that the taxpayer has not been reimbursed and is not entitled to be reimbursed in respect thereof. Thus, a taxpayer who receives, in a year, a refund of dues that equals or exceeds the taxpayer’s annual dues paid to the union in that year cannot deduct the annual dues in the taxpayer’s employment income by virtue of paragraph 8(1)(i). In addition, the portion of the refund that exceeds the taxpayer’s annual dues must be added back to the taxpayer’s income by virtue of paragraph 6(1)(j).
Where, on the other hand, the amount paid by the union to its members is paid in connection with the termination of the union's activities and its dissolution and is derived from a distribution of the union's residual assets, we are of the view that it must be determined what portion of the amount received by the taxpayer constitutes a refund of annual dues and what portion constitutes a payment of a capital nature received as proceeds of disposition of the taxpayer’s rights held as a member of the union.
In a similar situation involving the dissolution of a union and the distribution of funds to its members, we had to analyze whether the amount received by the member in connection with the termination and dissolution of the union constituted income from a source for the purposes of section 3 of the Act, a windfall, or a capital payment. XXXXXXXXXX In that particular situation, the members of the union had not paid any annual dues in the year in which the residual funds were distributed by the union.
According to the facts described here, sums were paid by a trade union to its members. It is stated, on the one hand, that the sums paid constitute a refund of dues and, on the other hand, that the said refund is made in view of the cessation of the union's activities. Taking into account the facts described above, we are of the view that there are good arguments to state that the amount received in XXXXXXXXXX by each of the members, up to the amount of their union dues paid in XXXXXXXXXX, constitutes a refund of their annual dues that reduces or cancels the deduction provided for in subparagraph 8(1)(i)(iv) in computing their employment income. For those members who received an amount in excess of their annual contribution of XXXXXXXXXX, we are of the view that it would be more difficult to argue that this excess is a refund of annual contributions from previous years. In our view, the better position would be to treat the excess portion as a capital payment (a distribution of the residual assets of the union) received as proceeds of disposition of their rights. While we have no specific information regarding the adjusted cost base of the rights held by each member, we have traced to section 2 of the Professional Syndicates Act that the member's entrance fee must be $1.00 or more. Thus, it appears to us that the adjusted cost base of a member's rights should be minimal. Consequently, each of the members who received amounts in excess of their annual dues of XXXXXXXXXX, in the context of the termination and dissolution of the Union, realized a capital gain which must be added in the computation of their income in XXXXXXXXXX.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch