February 20, 1989 Specialty Rulings Directorate G. Ozols 957-2127
SUBJECT: Workmen's Compensation OBJET:
DOSSIER
This is in reply to your memorandum of January 9, 1989 and enclosures requesting our comments on what amounts should be included as compensation for the purpose of paragraph 56(1)(v) of the Income Tax Act (the "Act").
Paragraph 56(1)(v) of the Act requires workmen's compensation to be included in income. A corresponding deduction in calculating taxable income is allowed by subparagraph 110(1)(f)(ii). While therefore non-taxable, such compensation nevertheless is relevant when determining the extent to which the recipient may be claimed as a dependant by another taxpayer and also the amount that is the total of the family net income for purposes of the child and federal sales tax credits and some provincial tax credits.
The letters that you enclosed from the Department of Finance indicate that in their opinion compensation generally would not include payments to third parties by a Compensation Board on behalf of a person receiving a compensation award for medical or other care or supplies, rehabilitation, retraining, etc.
In our opinion, based on the present wording of paragraph 56(1)(v) of the Act, there is little basis for excluding such payments to third parties from the meaning of the word "compensation". Paragraph 56(1)(v) of the Act requires that the compensation be "received", but compensation can take other forms besides cash payments directly to the claimant. We have looked at the various provincial workers' compensation acts and a number of them define compensation as including medical aid. All of them provide for the provision of not only medical aid but also of rehabilitation services. Some also provide for retraining of injured workers.
Interpretation Bulletin IT-202R2 states that compensation "refers to the amount of an award, as adjudicated by a compensation board, which a worker or his or her dependents will receive ...". An award, in our view, can include the receipt of medical aid or rehabilitation services. There is nothing in the drafting of the various workers' compensation acts that lead us to believe that the word compensation should be limited to direct cash payments.
In most cases, we suspect that whether or not non-monetary compensation is included will have no negative tax consequences for the taxpayer. However, we would point out that there may be situations where the inclusion of non-monetary compensation (the value of which could be quite large) could render the taxpayer ineligible as a dependent to another taxpayer or make the child and federal sales tax credits (or perhaps provincial tax credits) unavailable, which might not have been the case had the taxpayer not been injured or had only the wage replacement or pension portion of a compensation award been included in his income.
We note also that in one letter the Department of Finance states that "interest included in an award to compensate for a delay in making the award would also normally be counted as compensation". It is our opinion that interest on retroactive workmen's compensation awards calculated on payments from the date the recipient was entitled to receive the payment as a result of the award to the date the award is made, should not be included in the recipient's income. This is consistent with our position on pre-judgement interest on damages for personal injury or death or wrongful dismissal. However, interest on such payments calculated from the date of the award to the date of actual payment should be included in the recipient's income as interest pursuant to paragraph 12(1)(c) of the Act.
We trust the above is of assistance to you.
Original signed by Original signé par
M.A. HILTZ M.A.G. Hiltz A/Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch