Help unemployed clients through difficult times

Why read this?

Your clients are:

• collecting worker’s compensation;
• suing for lost wages or wrongful dismissal; or
• receiving social assistance.

What to do

Report workers’ compensation benefits (WCB)

› Report the amount in Box 10 of your client’s T5007: Statement of Benefits slip, on Line 144 of the return.

› Claim a deduction on Line 250 of the return for benefits entered on Line 144. “In most instances, claims arising out of WCB are non-taxable. They’re included in calculating total income, but then they are deducted in calculating taxable income,” explains Andrew Pitre, an accountant in Kelowna, B.C.

Report settlements and awards

If your client gets compensation for wrongful dismissal or wages owed, it’s reported in the year received, explains Catherine Barrie, an accountant in Barrie, Ont.

TIP

For tax-efficiency, consider structuring a settlement so your client is paid over multiple years, says Barrie.

If your client lived with a spouse or common-law partner when she received the payments, the partner with the higher income reported on Line 236 (excluding the amounts on Line 214 and Line 235) must report all payments.

› Report the amounts in Boxes 66 or 67 of your client’s T4: Statement of Remuneration Paid on Line 130 of her return.

Report social assistance payments

› Report the amount in Box 11 of your client’s T5007 (or Relevé 5 slip in Quebec) on Line 145.

› Your client or her partner should claim a deduction on Line 250 for the amounts entered on Line 145.

Report social benefits repayments

› Complete the chart on your client’s T4E: Statement of Employment Insurance and Other Benefits, to determine how much she has to repay, if:

ONLINE:

To check tax rates for lump-sum payments, visit CRA’s page on withholding rates.

For more on claiming legal fees, read Interpretation Bulletin IT-99, Legal and Accounting Fees.

» there’s an amount in Box 15 of your client’s T4E,

» the rate shown in Box 7 of the T4E is 30%, or

» your client has more than $63,500 in income.

› Enter the amount on Line 4 of the T4E on Lines 235 and 422 of the return.

claim legal fees

If your client incurred legal fees to establish a right to lost wages, including for wrongful dismissal, those fees are deductible—even if your client is unsuccessful. Your client may also claim legal fees incurred to establish a right to other amounts reported as employment income, even if they’re not directly paid by her employer.

› Claim the legal fees on Line 229 of the return.

Your client’s claim must be reduced by the amount of salary or wages recovered, including any award reimbursing your client for the fees directly.

Wrongful dismissal payments and salary owed

If your client gets a payment for wrongful dismissal, the money is reported in the year it’s received. However, if it’s received in a different year than when your client earned it, she can ask CRA to calculate the tax as though the money was received in the same year. CRA will only do a recalculation if the lump sum is at least $3,000 and includes pension or superannuation benefits, or court-ordered employment compensation.

If a court settlement for wrongful dismissal includes damages for mental anguish suffered on the job (and not because of losing the job), that part of the settlement may not be taxable. For ease of reporting, ensure your client’s settlement breaks down compensation by taxable and non-taxable damages.

Sources: Catherine Barrie, CPA, CGA, Barrie, Ont.; Andrew Pitre, CPA, CA, PDC Business & Tax Chartered Accountants, Kelowna, B.C.; CRA; KPMG’s Tax Planning for You and Your Family, 2016.