Date: 20010419
Docket: 1999-756-IT-G
BETWEEN:
IRENE WHITNEY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1] These appeals are from assessments for the appellant's 1996 and 1997 taxation years. In those years she received $25,291.52 and $18,477.04 respectively from her employer as the result of a work related injury. The question is whether these amounts are to be included in her income under paragraph 56(1)(v) of the Income Tax Act and are therefore deductible from income in computing taxable income under paragraph 110(1)(f).
[2] Paragraph 56(1)(v) requires the inclusion in income of
compensation received under an employees' or workers' compensation law of Canada or a province in respect of an injury, a disability or death.
[3] Paragraph 110(1)(f) permits the deduction in computing taxable income of, inter alia, any amount that is
(ii) compensation received under an employees' or workers' compensation law of Canada or a province in respect of an injury, disability or death, except any such compensation received by a person as the employer or former employer of the person in respect of whose injury, disability or death the compensation was paid.
[4] The French versions of these provisions read as follows
56(1)v) une indemnité reçue en vertu d'une loi sur les accidents du travail du Canada ou d'une province à l'égard d'une blessure, d'une invalidité ou d'un décès.
110(1)f)(ii) une indemnité reçue aux termes d'une loi fédérale ou provinciale sur les accidents du travail pour blessure, invalidité ou décès, à l'exception d'une indemnité qu'une personne reçoit à titre d'employeur ou d'ancien employeur de la personne pour laquelle une indemnité pour blessure, invalidité ou décès a été payée.
[5] The respondent says that the payments received by Ms. Whitney fall into neither paragraph 56(1)(v) nor paragraph 110(1)(f), but are taxable under section 5 of the Income Tax Act as income from employment.
[6] The parties filed as Exhibit A-R-1 a partial agreed statement of facts, which reads
1. The Appellant, IRENE WHITNEY, resides in Saint John, New Brunswick, and is employed as a school custodian in Saint John, by School District 8 of the Department of Education of the Province of New Brunswick.
2. As such, her terms and conditions of employment are governed by a collective agreement between Canadian Union of Public Employees, Local 1253, and Board of Management of the Province of New Brunswick, her statutory employer.
3. The Appellant was injured at her workplace on September 24, 1993. The claim was forwarded to the Workplace Health and Safety Commission and after investigation, the Commission advised Ms. Whitney that her claim was accepted.
4. As a result, Ms. Whitney remained on compensation and off work from September 23, 1993 until November 8, 1997, when she was able to return to her normal duties for the school district in a reduced workday.
5. The Province of New Brunswick which employs civil servants and other public employees including school district employees such as Ms. Whitney, is a self-insured employer for the purposes of application of benefits available to injured workers under the Workers Compensation Act.
6. Under the collective agreement between Local 1253 and Board of Management, Article 27.01 provides as follows (at all times material both before and after the 1992 amendments)
"ARTICLE 27 - WORKERS' COMPENSATION:
27.01 (a) For the period determined by the Workers' Compensation Board that an employee is unable to perform his or her normal duties because of work-related injury or illness the employee shall receive his or her regular pay from the Employer. The Employer obligation shall not be applicable once the employee is determined eligible for extended earnings loss status by the Workers' Compensation Board.
Where it is determined under the Workers' Compensation Act that an employee cannot or is not entitled to return to his/her position or portion thereof the employee shall be laid off and any resulting vacancy shall be posted and filled in accordance with Article 12.01. The laid off employee shall retain the rights provided in paragraph 5 of the Letter of Intent re articles 13, 15, and 18.
(b) Where a School Bus Driver is unable to perform his or her duties because of work-related injury or illness, and where, due to lack of work the School Bus Driver would have been laid off (July and August) such employee shall not receive his or her regular pay from the school board for this period (i.e., July and/or August). Where it is anticipated a School "Bus Driver will be on Workers' Compensation benefits during July and/or August the Employer shall notify the Workers' Compensation Board in advance.""
See Exhibit 13
7. On May 21, 1992, amendments were made to the statutes governing the workers' compensation scheme in New Brunswick.
8. A copy of the Act with the relevant changes are attached as Schedule "A".
9. In 1996, the Appellant was in receipt of $25,291.52 from her employer. She also received a payment of $14,350.00 from the WHSC Commission as a lump sum payment.
10. In 1997, the Appellant was in receipt of $18,477.04 from her employer. She also received $2,151.00 from the WHSC Commission as a long term disability pension.
11. The Appellant did not claim the amounts of $25,291.52 and $18,477.04 as taxable income.
See Exhibits 6 and 7
12. On July 10, 1998, Revenue Canada advised the Appellant that they proposed to reassess her for 1996 and 1997 on the following basis:
"Upon reviewing the above-mentioned returns it has been noticed that the employment earnings received from the Province of New Brunswick was not fully reported as taxable income. The Workers' Compensation Act was changed in 1992 with changes taking effect as of January 1, 1995. The new rules affect employees of self insured employers such as the Provincial and Federal Governments. Workplace Health Safety and Compensation Commission state that provincial employees do not qualify for compensation benefits therefore, your employment earnings are fully taxable."
See Exhibit 5
13. On July 20, 1998, Revenue Canada provided the Appellant with Notices of Reassessments for both 1996 and 1997.
See Exhibits 8 and 9
14. On July 31, 1998, the Appellant filed Notices of Objection in regard to both reassessments.
See Exhibits 10 and 11
15. On November 3, 1998, Revenue Canada sent a Notice of Confirmation to the Appellant which was received on November 8, 1998.
16. On February 1, 1999, the Appellant filed her Notice of Appeal.
[7] Attached as Schedule A to the Exhibit A-R-1 is a copy of the amended Workers' Compensation Act of New Brunswick (the "WC Act"). Subsections 38.2(1) to 38.2(2.6) read
38.2(1) Where a worker is injured or suffers a recurrence of an injury on or after January 1, 1982, but before January 1, 1993, the compensation payable under this Part shall be awarded as set out in this section.
38.2(1.1) Where a worker is injured or suffers a recurrence of an injury on or after January 1, 1993, the compensation payable under this Part shall be awarded as set out in this section.
38.2(2) Where injury or recurrence of an injury to a worker referred to in subsection (1) results in a loss of earnings beyond the day of the injury, the Board shall estimate the loss of earnings therefrom and shall, subject to subsection (4.1), pay compensation to the worker in an amount equal to ninety per cent of the estimated loss of earnings.
38.2(2.1) Where injury or recurrence of an injury to a worker referred to in subsection (1.1) results in a loss of earnings beyond the day of the injury, the Board shall estimate the loss of earnings from the day of the injury and shall pay compensation to the worker in an amount equal to eighty per cent of the estimated loss of earnings for the first thirty-nine weeks from the day of the injury or recurrence of the injury and thereafter in an amount equal to eighty-five per cent of the estimated loss of earnings.
38.2(2.2) Notwithstanding subsection (2.1), the Board shall not pay compensation under subsection (2.1) until the worker who is injured or has suffered a recurrence of an injury has not received any remuneration from the employer or any income replacement or supplement benefit from the employer or from an employment-related source for a period of time after the injury or recurrence of the injury that is equivalent to three working days.
38.2(2.3) The Board shall not pay compensation to a worker in respect of the period of time referred to in subsection (2.2) except as provided for in subsection (2.4).
38.2(2.4) Where a worker is disabled as a result of an injury or recurrence of an injury for more than thirty working days, the Board shall pay compensation to the worker in respect of the period of time referred to in subsection (2.2).
38.2(2.5) Notwithstanding subsection (2.1), where a worker has not received remuneration from the employer or any income replacement or supplement benefit from the employer or from an employment-related source in respect of the injury or recurrence of the injury for a period of time after the injury or recurrence of the injury that is equivalent to three working days and where the worker commences to receive compensation under subsection (2.1), there shall be payable to the worker only that portion of compensation which, when combined with the amount of any remuneration received by the worker from the employer or any income replacement or supplement benefit received by the worker from the employer or from an employment-related source, does not exceed
(a) in the first thirty-nine weeks from the day of the injury or recurrence of the injury, eighty per cent of the worker's pre-accident net earnings calculated for the same period of time as that during which compensation is paid, and
(b) thereafter, eighty-five per cent of the worker's pre-accident net earnings calculated for the same period of time as that during which compensation is paid.
38.2(2.6) Where a collective agreement, arbitral award or contract of employment is in effect on January 1, 1993 and provides for remuneration from the employer or for an income replacement or supplement benefit to be paid to a worker by the employer or from an employment-related source where the worker suffers an injury or recurrence of an injury, subsections (2.2) to (2.5) do not apply until a successor collective agreement, arbitral award or contract of employment commences or until January 1, 1995, whichever occurs first.
[8] The appellant was a member of the Canadian Union of Public Employees ("CUPE") and an employee of School District 8 of the Department of Education of New Brunswick. When she was injured at work she received her regular pay from her employer in accordance with article 27.01 of the collective agreement and not from the Workers' Compensation Board ("WCB"). The payments commenced immediately after the injury and not after a three-day delay as was required in the case of payment from the WCB. Moreover, she received 100% of her regular pay rather than 85%, the amount paid by the WCB (I have used 85% although the percentage varied over time from 80% to 90%).
[9] The practice of the Department of National Revenue prior to the amendment to the WC Act was to allow the injured worker to deduct under paragraph 110(1)(f) the portion of the amount paid to him or her that was equal to the amount that would have been paid by the WCB.
[10] The Province of New Brunswick did not pay premiums under the WC Act. It was described as "self insured", and it paid workers compensation benefits directly to the injured employee. The arrangement between the province and the WCB seems to have been an extra-statutory one. The definition of employer in the WC Act includes the Crown in right of New Brunswick, and any boards, commissions or corporations created by the province.
[11] The procedure followed in cases of work related injuries of employees of such "self insured" employers was that the claim would be reported in the usual way, the matter would be referred to the WCB who would determine the entitlement to compensation on the basis of such medical tests and the period for which it would be paid. The only difference from the case where the compensation is paid directly by the WCB is that the compensation would be paid by the employer. In the present case, under the collective agreement, the injured employee was paid 100% of her wages or salary.
[12] The question is whether such amount is "compensation received under an employees' or workers' compensation law of Canada or a province in respect of an injury, disability or death ...." within the meaning of paragraph 110(1)(f).
[13] The French version of paragraph 110(1)(f) uses the words "aux termes d'une loi ..." whereas the French version of paragraph 56(1)(v) uses the words "en vertu d'une loi". The English term "under" is used in both provisions.
[14] The reason for denying the deduction under paragraph 110(1)(f) of payments received by the appellant is set out in the letter of December 20, 1995 from R.G. D'Aurelio, Revenue Canada, to I. MacKinnon, Benefit Programs, Province of New Brunswick. It is based upon the amended WC Act set out above. Mr. D'Aurelio's letter reads
We are writing further to our telephone discussions and faxes concerning the income tax implications of the recent amendments to the New Brunswick Workers' Compensation Act with respect to self-insured employers and compensation for on the job injuries. We apologize for the delay of our response which was necessitated by a review of the workers' compensation legislation.
It is our understanding that subsection 38.2(2.1) of the new legislation states that the Workers' Compensation Board (WCB) can only pay compensation whenever the worker has not received any remuneration from the employer for a period of three working days after the injury. If the employer pays remuneration for any or all the three days, the employee is not entitled to workers' compensation benefits. Normally, in the case of a self-insured employer, an employee, who is injured on the job, would continue to receive regular remuneration. Once the claim for WCB benefits is adjudicated, the remuneration is then categorized as WCB benefits for income tax purposes and a T5007 for this amount would be issued by the WCB.
It is also our understanding that the intent of the legislation is to have the remuneration received by employees of self-insurers taxed by disqualifying it as WCB benefits. We agree that the legislation achieves the objective of ensuring that employees of self-ensured employers would not, in accordance with this subsection, be entitled to a WCB benefit.
Paragraph 56(1)(v) of the Income Tax Act (the Act) defines workers' compensation as "compensation received under an employees' or workers' compensation law of Canada or a province in respect of an injury, a disability or death" and by virtue of this section the amount received is included in income and an offsetting deduction is available under paragraph 110(1)(f) of the Act. However, in order for the amount to benefit from this inclusion and offset, it would have to constitute "workers' compensation", which it would not in situations where the WCB, as a result of subsection 38.2(2.2), does not pay compensation.
In cases where an employee is in receipt of employment related remuneration in addition to being entitled to compensation under the New Brunswick legislation, there shall be payable to the injured worker only that portion of compensation which, when combined with the amount of any employment related remuneration does not exceed certain levels. Any excess amount ("top up") would not qualify as income under paragraph 56(1)(v) of the Act and would be taxable pursuant to the applicable provision, as salary, wages, unemployment insurance benefits, etc.
We trust that this will be of assistance.
[15] This ruling generated more correspondence and memoranda. A memorandum was issued by the Director, Pensions and Insured Benefits of New Brunswick as follows
Employees of Parts 1 and 2 of the Public Service receive 100% salary continuation for injury/accident on duty under the Workers' Compensation Act and are not subject to the three day non-payment period.
We are in receipt of correspondence from Revenue Canada indicating that payments made under this arrangement are not subject to exemption from taxable income under the Income Tax Act. For this reason, no adjustments will be made to T4 slips, nor will the W.H.S.C.C. be issuing letters indicating a portion of benefit as non-taxable income for benefits received in 1995 and after.
[16] A memorandum to the same effect was sent to the employees in receipt of workers' compensation benefits of School District No. 8.
[17] On May 2, 1996 the Legal and Legislative Representative of CUPE wrote to Mr. D'Aurelio as follows
I am writing in regard to your letter dated December 20, 1995, to Isaobel MacKinnon, Manager of Benefit Programs with the New Brunswick Department of Finance, and the repercussions therefrom.
For your information, attached is a memorandum dated January 23, 1996, from Cyril Theriault, Director of Pensions and Insured Benefits which refers to correspondence from Revenue Canada -- your letter.
CUPE is of the view that this change in exemption from taxable income is legally incorrect, and should be corrected. Here is why.
Perhaps you are not aware of the entire background, which I will highlight using Council of School Board Unions (CUPE 1253) as an example. This concerns a self-insured employer in Part II of the Public Service Labour Relations Act.
Prior to 1995 implemented changes to the Workers' Compensation Act, when a worker's compensation claim was made by a school board employee (member of CUPE 1253), the Workers' Compensation Board ("WCB") would adjudicate the claim and determine if the matter was compensable.
Once a compensable injury was found, then Article 27 of the Collective Agreement (between the Board of Management and CUPE 1253) would kick in. It reads in part:
Article 27 – WORKERS' COMPENSATION
27.01(a) For the period determined by the Workers' compensation Board that an employee is unable to perform his or her normal duties because of work-related injury or illness the employee shall receive his or her regular pay from the Employer. The Employer obligation shall not be applicable once the employee is determined eligible for extended earnings loss status by the Workers' Compensation Board.
Also, once a compensable injury was found, the employee would be entered into the system at the Workers' Compensation Board (now the Workplace Health Safety and Compensation Commission) ("WHSCC").
As far as the Employer was concerned, the employee was then on workers' compensation. A letter would be sent from the Workers' Compensation Board ("WBC") to the Employer indicating: claim number; general information; effective date of payment; whether it was minor, major, or other; whether the employee was receiving full salary from the employer; and a return to work date. A sample letter, dated December 10, 1991, is enclosed for your information.
Under this arrangement prior to 1995, the WCB did not issue cheques; the School Board did. And the WCB never determined the amount to pay.
Under that system employees properly received from the School Board their T5/letter of exemption for Revenue Canada's purposes (a sample dated 95/01/11 is enclosed).
The changes implemented in 1995 should be a non-issue in this arrangement. They do not change anything insofar as the T5/letter of exemption is concerned.
An employee must still fulfill the statutory definition under the Workers' Compensation Act. The question of whether or not an injury is compensable under the Workers' Compensation Act is still adjudicated upon by the WHSCC. A sample letter from a School Board dated March 6, 1996, is enclosed. The employer would not be paying compensation if the employee were not entitled to workers' compensation.
In your December 20, 1995, letter to Isaobel MacKinnon, you quote paragraph 56(1)(v) of the Income Tax Act, which defines workers' compensation as "compensation received under an employees' or workers' compensation law of Canada or a province in respect of an injury, a disability or death". In order for monies to be included in income and an offsetting deduction, this definition must be met. It is. The fact that the WHSCC (formerly the Workers' Compensation Board) does not actually make the payments does not alter the characterization of these monies as workers' compensation. The statutory definitions in the Workers' Compensation Act (WCA) must still be met, the claim adjudicated upon the WHSCC, pursuant to the WCA, etc. before monies are paid. Therefore, these monies do qualify as workers' compensation under the Income Tax Act. Nothing in the WCA states otherwise.
Revenue Canada, Taxation Interpretation Bulleting No. IT-202R2 dated September 19, 1985, supports this interpretation. Under paragraphs 4 and 5 it states:
4. For the purpose of paragraph 56(1)(v) the amount of compensation may be received either from a compensation board or from the employer or former employer of the person entitled thereto. An employee may, under the terms of an employment contract or collective agreement, or by reason of being granted injury leave with pay under the Financial Administration Act, be entitled to receive salary or wages during a period in which the employee is also entitled to compensation. Where, in these circumstances, the employee receives no payment from a compensation board, the amount received from his or her employer, to the extent that it does not exceed the compensation amount, will be included in the employee's income for the year, as compensation, under paragraph 56(1)(v). The excess, if any, will be included in the employee's income under subsection 5(1).
Deduction in Computing Taxable Income
5. For 1982 and subsequent taxation years, any compensation received by a taxpayer in a taxation year, that was included in the taxpayer's income under paragraph 56(1)(v), any, by virtue of subparagraph 110(1)(f)(ii), be deducted in computing the taxpayer's taxable income for the year, except any such compensation received by the taxpayer as the employer or former employer of the person in respect of whom the compensation was paid.
We are further of the view that the Employer is obliged to provide this workers' compensation information on Form T5007 or "exemption letter" and reflect it on the T4 Supplementary slip. Right now, I am advised, the Employer is not doing this. We ask that you take immediate steps to require the Employer to give full T4 information showing workers' compensation paid, like it used to.
As you can appreciate, we are committed to ensuring that injured workers receive their tax exemption for workers' compensation. The plight of injured workers is already bad enough without making them suffer even further.
Thank you very much for your attention to this important issue, and please do not hesitate to contact me if you require any additional information.
[18] The letter did not avail. Mr. D'Aurelio wrote back as follows on May 15, 1996
We are writing in reply to your letter of May 2, 1996, in which you disagree with the position expressed in our letter of December 20, 1995, to Ms. I. MacKinnon of New Brunswick Finance, concerning the tax status of compensation received by an employee from a self-insured employer, as a result of on-the-job injuries.
In this regard, it is your opinion that the changes to the New Brunswick Workers' Compensation Act should be a non-issue and that the amount to be reported on Form T5007 should to be affected.
Where a self-insured employer continues to pay an employee regular remuneration in the case of a work-related injury, the employee would not, in our view, be entitled to workers' compensation as a result of new subsection 38.2(2.3)[1] of the New Brunswick Workers' Compensation Act which states, in part, that: ... the Board shall not pay compensation under subsection (2.1) until the worker who is injured ... has not received any remuneration from the employer ... or from an employment-related source for a period of time after the injury ... that is equivalent to three working days. This provision is effective on the earlier of January 1, 1995, and the date that collective agreements, arbitral awards or contracts of employment that were in effect on January 1, 1993, were replaced.
The amount received by the employee in this situation would not be considered to have been received under an employees' or workers' compensation law of Canada or a province as noted in paragraph 56(1)(v) of the Income Tax Act. It follows that the employee would not be entitled to the offsetting deduction under paragraph 110(1)(f); this amount would be included in the employees' income pursuant to subsection 5(1) of the Income Tax Act and should be reported as such.
We trust that this will be of assistance.
[19] This correspondence is important for two reasons. It is an articulate explanation of the reasoning that lies behind the conflicting positions, and it demonstrates the importance and far-reaching effect of the change in policy by the Department of National Revenue.
[20] For the reasons that follow, I have concluded that notwithstanding the able argument by counsel for the respondent, the legally correct view is the one advanced by CUPE and by Mr. Brown on behalf of the appellant. Essentially there are four reasons for this conclusion.
(a) I do not think it is necessary to go beyond the plain meaning of the words, as set out above in both French and English. "Under" is a common English word of reasonable elasticity. Where the entitlement to workers' compensation is made by the WCB under the WC Act the receipt of that compensation constitutes a receipt under an employees' or a workers' compensation law of a province. The Province of New Brunswick is an employer within the meaning of the WC Act. All of the procedures for claiming compensation by an injured employee conform to the WC Act, which determines the entitlement and duration of the compensation. The right to be paid compensation by the employer in accordance with article 27 of the collective agreement is entirely dependent upon the direction of the WCB.
(b) The overall scheme of paragraphs 56(1)(v) and 110(1)(f) of the Income Tax Act is that payments of compensation to injured employees who cannot work are not taxable. The Crown's position would, in my view, run counter to this legislative scheme. I find support for this approach in the words of Cartwright J. (as he then was) in Highway Sawmills Ltd. v. M.N.R., 66 DTC 5116 at 5120 (S.C.C.)
The answer to the question what tax is payable in any given circumstances depends, of course, upon the words of the legislation imposing it. Where the meaning of those words is difficult to ascertain it may be of assistance to consider which of two constructions contended for brings about a result which conforms to the apparent scheme of the legislation.
(c) Moreover, the Crown's interpretation, if adopted, would lead to an absurdity in that it would mean that a member of CUPE who was employed by a self insured employer would have his or her compensation amount taxed simply because the right to compensation was determined under the WC Act but the compensation is paid by the employer under a collective agreement, whereas one who worked for a private employer and was paid 85% of his or her salary by the WCB and had that compensation "topped up" by the employer to an amount equal to his regular salary would not be taxed on the 85%. Where the two interpretations are possible and one leads to an absurdity and one does not, the latter must be chosen: Victoria City v. Bishop of Vancouver Island, [1921] 2 A.C. 384 at 388 (P.C.).
(d) If there were any ambiguity or doubt in the application or interpretation of the legislation, that doubt must be resolved in favour of the subject. (Fries v. The Queen, 90 DTC 6662 (S.C.C.))
[21] I have carefully read the reasoning contained in the two letters from Mr. D'Aurelio. With respect, I do not think that the amendments to the WC Act contained in subsections 38.2(2.1), (2.2) and (2.3) warrant the rejection of the beneficial and legally correct position that prevailed before the amendments. I cannot, however, justify allowing a greater deduction than would have been available had the payments come directly from the WCB.
[22] The appeals are allowed with costs and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that of the workers' compensation received from the employer amounts equal to the amounts that would have been received directly from the Workers' Compensation Board calculated in accordance with subsection 38.2(2.1) of the Workers' Compensation Act are to be included in the appellant's income under paragraph 56(1)(v) of the Income Tax Act and deducted from the appellant's income under paragraph 110(1)(f) of the Income Tax Act.
Signed at Vancouver, Canada, this 19th day of April 2001.
"D.G.H. Bowman"
A.C.J.