Principal Issues: Does the lump sum received by employees under a pay equity settlement constitute a "qualifying amount" for the purpose of section 110.2 of the Act.
Position: Only the amounts paid according to the arbitration award can be considered qualifying amounts.
Reasons: Wording of the Income Tax Act.
André Perrier Headquarters Legislation Section Income Tax Rulings Directorate Program Services and Support Division Martine Filiatrault, CPA, CA Individual Returns Directorate Assessments, Benefits and Service Branch
2020-085847
Qualifying retroactive lump sum payment
This is further to your email of August 5, 2020 requesting our opinion as to whether certain amounts paid in 2019 by XXXXXXXXXX (the "Employer") to its XXXXXXXXXX employees as part of a pay equity settlement could be considered "qualifying amounts" as defined in subsection 110.2(1) of the Income Tax Act (the "Act").
You have provided us with certain documents and information that have allowed us to locate the two arbitration awards relating to retroactive payments that the Employer made in 2019; one dated XXXXXXXXXX and the other dated XXXXXXXXXX. Both awards related to the pay equity settlement for the XXXXXXXXXX employees. We also located and considered a number of communiqués issued in 2018 and 2019 by the Union and the Employer that reported on the steps taken to achieve this settlement. Our understanding of the facts is that this settlement resulted in some payments being made to XXXXXXXXXX employees in 2019 and covered, among other things, back pay for the years 2016, 2017 and 2018.
Sections 110.2 and 120.31 may provide relief to certain individuals who receive taxable lump sum payments from their employer in respect of services that were rendered in previous years. Under these provisions, if the individual's current tax liability under Part I of the Act in respect of that payment is greater than it would have been if each part of the amount had been taxed in the particular year to which it relates, the individual's tax liability is essentially calculated by reference to the lower amount of notional Part I tax.
More specifically, in computing taxable income for a taxation year, section 110.2 of the Act allows individuals to deduct the total of all amounts each of which is a "specified portion" of a "qualifying amount" received by the individual in the particular year if the total is $3,000 or more (without interest). In addition, the portion of the qualifying amount must relate to an "eligible taxation year". Each of those terms is defined in subsection 110.2(1). In order to qualify for this treatment, the payment must be one of the types described in the definition of "qualifying amount" in subsection 110.2(1).
For the purposes of this special tax computation, a "qualifying amount" is defined, inter alia, as a lump sum amount included in an individual's income from an office or employment that is received in satisfaction:
1) an order or judgment of a competent tribunal,
2) an arbitration award, or
3) a contract by which the payer and the individual terminate a legal proceeding.
In this situation, unless further awards have been made, we are of the view that only amounts included in income from an office or employment and received pursuant to the XXXXXXXXXX and XXXXXXXXXX awards can be considered "qualifying amounts" for the purposes of section 110.2.
In addition, the amounts described in the XXXXXXXXXX arbitration award that were paid to compensate for the direct wage gap (para. [51]), annual leave (para. [77]), pre-retirement leave (para. [85]), and the adjustment to the compensation of successor permanent employees (para. [90]) could be considered qualifying amounts for the purposes of section 110.2. Consequently, amounts of salary adjustments received in the context of pay equity, but which were paid pursuant to the Memorandum of Understanding (footnote 1) agreed to between the Employer and the Union, are not considered "qualifying amounts" under section 110.2.
We hope that our comments are of assistance.
Nancy Deslandes, CPA CGA
Manager
Business and Employment Income Section
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 See Annex A of the XXXXXXXXXX arbitration award.