Published: January 28, 2025
Last Updated: January 28, 2025
Introduction: Tax Treatment of Employment-Related Settlements and Monetary Awards, Strike Pay for Union Workers, And Employment Income from An Employer on A Reserve
Canada has special income tax rules that exempt from taxation some income from an individual’s employment. In the previous articles of this series, we discussed the special income tax rules for:
- Canadian Armed Forces members and veterans
- Employees at foreign embassies, prescribed international organizations, and prescribed international non-government organizations in Canada.
To conclude this series, this article explores other common circumstances in which tax exemptions apply. To clarify, in this article, the term “Indian” refers to indigenous people who are registered band members because of its specific legal definition and reference in the Indian Act.
This article provides general tax advice on certain circumstances that warrant income tax exemption. For more information on employment income and expenses, you can refer to the following articles:
- How to Determine the Place of Employment for a Remote Worker: Here are CRA’s Rules
- Independent contractors like cab drivers can be deemed employees even if they file taxes as “self-employed”: Beach Place v. Employment Standards Tribunal (2022)
- Employee Tax Secrets T2200: Deducting Employment Expenses
The Tax Treatment of Severance and Settlement Awards Follows The Surrogatum Principle
For Canadian tax purposes, damages or compensation received by a taxpayer pursuant to a court order, an out-of-court settlement, or any type of legal agreement may be considered as income, capital gains, or windfall received by the taxpayer. As a result, the tax treatment of payments received is determined based on the nature and purpose of the payments.
For example, in Saunders v The Queen, 2020 TCC 114, the court applied the normal rule and found a monetary award received from a successful grievance should be included in the recipient’s income as employment income, since the award replaced the remuneration that the recipient would otherwise have received as overtime compensation.
The same principle applies to the amount received by a taxpayer as a result of an employment dispute settlement. If the settlement payment is to compensate the taxpayer for lost salaries, wages, or commissions, then the payment is likely taxable as employment income. If the settlement payment is to compensate the taxpayer for a hostile working environment, discrimination, or harassment, then the payment is likely not taxable and is not considered income.
For more information on the application of the Surrogatum Principle in Canada or the new mandatory disclosure rule in relation to employment-related settlements, please refer to our article: “New Reporting Rules on Tax Treatment of Severance Settlements; Update from a Canadian Tax Lawyer.”
Most Strike Pay For Union Workers is Not Taxable Income in Canada
In Canada, workers in certain industries have the legal right to form or join a union. A union provides employees with the ability to collectively bargain with management on working conditions, compensation, and other terms related to their employment. Unlike an individual employment relationship, union workers are subject to collective agreements entered into between the union and the employer.
As many collective agreements permit union workers to strike as a grievance procedure for resolving disputes between the union and the employer, some collective agreements provide for strike pay for union workers. Strike pay is a payment made by the union to the workers who are on strike, intended to help workers meet their basic needs during a strike, often sourced from the union-managed strike fund reserve.
Most strike pay for union workers in Canada does not need to be reported and is not taxable in Canada, although the Income Tax Act does not contain any specific provisions that exempt strike pay from income taxes in Canada.
In The Queen v Wally Fries, the Supreme Court of Canada confirmed the lower court’s ruling and found that strike benefits paid from a union’s strike fund or reserve to a union worker during a legal strike were not considered to be income within the meaning of paragraph 3(1) of the Income Tax Act.
As a result of the case, even if the strike pay is related to the union worker’s performance of picketing duties, it is not taxable as income. However, there are scenarios where strike pay may need to be included in a taxpayer’s income.
The Canada Revenue Agency (CRA) provides further explanations in the Income Tax Folio S3-F9-C1, Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime. Specifically, payments made by a union to its members for services performed during the course of a strike are included in income if the union member is employed by or is a consultant to the union permanently as a member of a temporary committee, or in some other capacity.
Employment Income from an Employer on a Reserve
Employment income is exempt from income tax in Canada under paragraph 81(1)(a) of the Income Tax Act and section 87 of the Indian Act only if the source of the income is “situated on a reserve.” Reserves are lands set aside for First Nations by the Canadian government, with most being in rural or remote areas.
Most people living on a reserve are Indigenous people who are registered band members (also referred to as individuals with Indian status). However, people without status may live on a reserve if the band council managing the reserve adopts a residence bylaw that regulates and determines the right to live on the reserve.
The Canada Revenue Agency has established and generally followed the Indian Act Exemption for Employment Income Guidelines to determine if employment income earned by a registered band member is exempt from taxes. This exemption may apply to people who are entitled to be registered band members. If a taxpayer’s employment income is exempt from tax under this exemption, the taxpayer does not need to include such income in the taxpayer’s personal income tax return.
The courts have established that determining whether employment income is situated on a reserve and qualifies for tax exemption must be determined via the “connecting factor test.” The test examines various factors connecting the income to a reserve by weighing the significance of each factor. Although there is no exhaustive list of factors to be considered, common factors considered in the “connecting factor test” include:
- Whether an actual duty of employment was performed;
- Whether an actual duty of employment was actually performed on a reserve; and
- What portion of the employment duties were performed on a reserve.
Pro Tips – Whether Employment-Related Income is Taxable Depends on the Facts
It can be difficult for ordinary taxpayers to understand whether compensation received in connection with their employment should be reported on their Canadian income tax returns and whether such compensation is taxable, especially if no tax slip is issued for the compensation received.
For example, if you receive a monetary award from a successful wrongful dismissal lawsuit, you may find it difficult to determine what part of the award is taxable. A general rule is that the tax treatment of compensation received depends on the nature of the compensation, but you should always consult with a top Canadian tax lawyer before claiming an exemption.
If you suspect that you have made mistakes regarding your income-tax filings or if you are unsure about the taxability of compensation that you have received, you should engage with one of our expert Canadian tax lawyers. Our expert Canadian tax lawyers can provide legal advice, identify any potential issues and areas of concern, and assist you with remedying your prior non-compliance (such as a Voluntary Disclosure Application).
FAQ
Do I Need to Report My Strike Pay on My Canadian Income Tax Returns?
Most strike pay for union workers in Canada does not need to be reported and is not taxable in Canada, even if the union workers are required to perform picketing duties before they receive the strike pay.
However, there are scenarios where strike pay may need to be included in a taxpayer’s income. Specifically, payments made by a union to its members for services performed during the course of a strike are included in income if the union member is employed by or is a consultant to the union permanently as a member of a temporary committee, or in some other capacity.
What Can I Do If I Mistakenly Fail to Report Some of My Employment-Related Income?
A Voluntary Disclosure Application may be an available option for you to remedy your prior tax filing errors. A due diligence review is also necessary to determine the scope of your prior non-compliance.
However, if the Canada Revenue Agency has discovered your previous failure to correctly report your employment-related income, you may not qualify for interest and penalty relief under the Voluntary Disclosure Program.
You may nevertheless be eligible to seek relief from penalties and interest via a Taxpayer Relief Application. If you would like to know whether any of the options apply to your situation, please contact one of our experienced Canadian tax lawyers.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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