In 2018, the provincial labour board ordered an employer, who committed an unfair labour practice to pay a lump sum payment to each of their employees.
Generally, when an employee receives a payment in relation to their employment, it is taxable under various provisions, set out in the income tax act.
However, in March 2019, the Canada Revenue Agency (CRA) released a technical interpretation (TI 2018-0748731E5) in response to this order, which further discusses the lump sum payment of damages awarded to employees as a result of unfair labour practices, and the associated income tax treatment and withholding requirements.
The CRA confirmed that certain payments would be non-taxable in the hands of the employees and therefore the employer would have no reporting or withholding obligations as a result of that payment.
Specifically, if the compensation was paid due to an employer’s interference with workers rights, as is the case in this situation, and the intention of the payment is not to compensate for the loss of income or benefits as a result of the unfair labour practice, the payments are not taxable.
There are, however, some cases, in which this treatment could change.
If you have had to make a payment for damages as a result of an unfair labour practice, you will first need to determine what the payment was intended to replace. This will in turn identify the tax treatment of that payment.
If the payments are deemed employment income, such as a payment made to compensate for the loss of income or benefits, or they are deemed retirement, such as payments made for the loss of employment or in recognition of long service, then they may in fact be taxable.
Because of these complexities, when dealing with damages paid as a result of unfair labour practices, it is imperative that you speak with a professional such as Koroll & Company.
To further discuss your specific situations, and the related reporting and withholding requirements, please contact us today.
