Getting the Taxman to Strike Back

As we come up on the federal budget, I asked my tweeps what was their budget wish list. I received an interesting reply.

strike pay

Many Canadians might not know that Canada’s treatment of strike pay is, in a word, curious. This paper by the esteemed Ben Alarie (who you really should follow on twitter: @BAlarie) walks you through the details which I will summarize here. If you are in a union, you are paying union dues. These union dues are deductible from income for tax purposes, much like RRSP contributions. If these union dues, in whole or in part, are diverted to a strike fund, then the union does not pay tax on these funds. If you then go on strike and receive funds from this strike fund in lieu of your salary, then these funds are….not taxable.

Huh, you say. That does not make sense (or at least I hope you are). After all, consider the tax treatment of RRSP contributions. Your contributions are deductible for tax purposes in exchange for withdrawals being taxable. TSFA contributions are the opposite. TSFA contributions are paid from after-tax dollars in exchange for withdrawals being not taxable. By the same logic, payments into the strike fund should be deductible if and only if payments from the strike fund are taxable. Because the union also does not pay tax on these funds, it means this income is never, ever subject to tax. I can’t think of a single other example where income is not taxed at any point.

So what is the ‘logic’ of these funds not being taxable? This comes from the Supreme Court decision in 1990 in Fries v. The Queen. The court ruled that strike pay is not income. Instead, as noted by Alarie, “strike pay is generally concerned with providing workers and their families with day-to-day sustenance over the course of a given labour dispute. Strike pay is not usually concerned with income replacement as such.” (p. 440) But the problem is that this policy is not fair based on horizontal equity grounds. As noted by Ronald Beer in our twitter exchange non-unionized and unionized workers without a strike fund workers facing a labour dispute are unable to fund their day-to-day substance during a labour dispute out of pre-tax dollars. They instead cover these costs out of savings from after-tax dollars or are forced to go on EI, which is a taxable payment. So unionized workers are treated favourably compared to non-unionized workers and unionized workers without a strike fund.

So what can we do? We could somehow set up a system where those without strike pay can set up a fund that is treated the same as strike pay. However, the administrative and compliance costs of such a fund would be ridiculously high. Alternatively, we can make strike pay taxable. While Alarie notes the difficulties with doing so, this certainly seems to be the more logical thing to do.

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15 thoughts on “Getting the Taxman to Strike Back

  1. I don’t think you can get EI when you are on strike. Or locked out for that matter.

    • No, you do not qualify, but you do if your employer shuts down which often is what happens in the private sector.

      • Then your statement that ” workers facing a labour dispute are unable to fund their day-to-day substance during a labour dispute out of pre-tax dollars. They instead cover these costs out of savings from after-tax dollars or are forced to go on EI” is inaccurate. You can’t get EI if you are in the middle of a labour dispute.

        And if one was to use TFSA funds to get by, the investment gains withdrawn are also not taxed.

        As for “a single other example where income is not taxed at any point”, what about non-taxable employee benefits. There are plenty of those that are deductible as an expense by the employer, but not taxed when received by the employee.

      • In the private sector, labour disputes can manifest themselves in ways such that an employee can claim EI.

        If you use TSFA funds this is not treated the same as strike pay.

        If you read my post, I am talking specifically about income, not income-in-kind.

      • If my employer pays me a car allowance they deduct the expense, the cash I receive isn’t taxed.

        When I was a self-emp sole prop I had to pay into workers comp. Premiums were deductible. Income received from WCB is not taxed.

      • The car allowance is reimbursement for costs, therefore not taxable.

        WCB is reportable on Line 144 as income. http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/144-eng.html

      • And then you take a corresponding deduction on 250 to remove it so it’s not included in taxable income and therefore not taxed.
        So union dues deductible, strike pay doesn’t get included as income and therefore not taxed.
        WCB paid deductible, income received not taxed.
        The only effective difference is that WCB recieved gets included in line 236 and the strike pay doesn’t. Neither is included in in line 260.

      • The premiums are deducted yes, but the premiums are less than the payments. The net WCB payment is taxable which is not the same as strike pay.

      • I fail to see how WCB is taxable. Strike pay doesn’t get reported at all. WCB gets included in total income (line 150) but is deducted on line 250. So neither is included in taxable income (line 260). So neither is taxed.

      • I fail to see how you fail to see. WCB is taxable. You seem to think premiums equal the WCB payment. They do not. All that is deducted is the premium. It is deducted as it is a cost of earning that income. Strike pay is never reported for tax purposes in this way.

      • No I guess I don’t. I don’t see how the money I receive from WCB when injured is taxable. It gets reported on line 144 and therefore forms part of total income on line 150, but that same amount is deducted on line 250 and therefore is not included in line 260 of my tax return. So it is not included in taxable income. I don’t pay any income tax on the money I received from WCB.

        So effectively the only difference between strike pay and WCB is one is included in line 236 which effects income tested benefits, and the other does not.

        Example:
        As a self employed person I pay $1000 in WCB premiums in 1st yr of business. I deduct this premium as a business expense.
        On January 1 of the next year I get injured and cannot work for an entire year. I have no other sources of income. I receive $45,000 in WCB benefits. I report the WCB income on line 144. I deduct $45,000 on line 250. My taxable income (line 260) for that year is $0.

        Now the alternate. I’m a unionized tradesperson. I pay union dues (part of which goes into a strike fund) which I can deduct on line 212. Then on January 1st (as above) my union goes on strike. I receive strike pay and have no other income for the year. None of it needs to be reported on my tax return.

        So in both cases my line 260 Taxable Income is $0.

        So yes, I fail to see how the two situations are different, except for the effect on line 236 which most income tested benefits (like the GSTC, CCTB) are based.

        The tax return guide specifically says “enter the amount shown in box 10 of your T5007 slip. Claim a deduction on line 250 for the benefits you entered on line 144”. This is confirmed by item #5 of IT-202.

        So yes WCB is income, but it is NOT included in taxable income.

        Am I misunderstanding para. 56(1)(v) and 110(1)(f)(ii) of the income tax act?

  2. If one wants to pursue the strike pay option, then allow after-tax contributions into a TFSA account by the union, employer or individual up to some limit, in addition to $5500 current annual contribution. Employee then would use the TFSA as needed, and if he/she did not strike, the funds would be available for other purposes. If the employee leaves the union, then the TFSA contributions from the past remain the employee’s funds.

    • Why would unionized employees give up their right, under the income tax act, that payment to the union for strike pay is not taxable?

    • This seems like it also has a horizontal equity problem. Why should a unionized employee receive more tax free investment growth than a non-unionized employee with the same income?

  3. Seems like taxing strike pay is the fair thing to do. Union dues at a closed shop and professional fees are payments made to earn income, so taxing them seems unfair. Also, was strike pay the only reason he gave for eliminating the deduction? If it was then professional fees seem double absurd, since that argument doesn’t really carry over to payments made to most professionals. Professional licensing bodies don’t normally have strike funds, and punishing engineers, accountants, lawyers, etc, because teacher’s unions (with strike funds) are nominally professional associations doesn’t really make sense.

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