426n (2006) vol. 54, n o 2 The Taxation of Strike Pay Benjamin Alarie and Matthew Sudak* Précis En 1990, dans l’arrêt Fries c. Sa Majesté la Reine, la Cour suprême du Canada a confirmé comme question de droit la pratique administrative de longue date de caractériser les allocations de grève comme un revenu non imposable compte tenu du fait qu’elles ne sont pas « un revenu […] dont la source » au sens de l’alinéa 3a) de la Loi de l’impôt sur le revenu. Aux États-Unis, par contre, les allocations de grève sont généralement assujetties à l’impôt sur le revenu, conformément à l’approche plus inclusive de la définition du revenu qui prévaut en vertu de l’article 61 de l’Internal Revenue Code. L’article examine en détail cette différence de politique fiscale. Dans le processus, les auteurs examinent la position d’autres pays devant des enjeux semblables, élaborent ce que l’on peut inférer à partir des conséquences fiscales et économiques probables de ne pas imposer les allocations de grève, et suggèrent certaines idées de réforme à l’intention des décideurs politiques canadiens. AbstrAct The Supreme Court of Canada in 1990 in Fries v. The Queen confirmed as a legal matter the longstanding administrative practice of characterizing strike pay as a non-taxable receipt by virtue of its not being “income . . . from a source” pursuant to paragraph 3(a) of the Income Tax Act. By contrast, in the United States, strike pay is generally subject to income tax, consistent with the more inclusive approach to defining income that predominates under section 61 of the Internal Revenue Code. This article examines in detail this tax policy difference. In the process, it canvasses the attitude of some other countries to similar issues, maps out what can be inferred about the likely fiscal and economic consequences of not taxing strike pay, and suggests some ideas for reform for Canadian policy makers. KEYWOrDs: Income n labour dIsputes n strIkes n tax exemptIons n tax polIcy n unIons * Of the Faculty of Law, University of Toronto. We are indebted to Jim Dinning for excellent research assistance. We extend thanks to Chris Bruce, Arthur Cockfield, David Duff, Tim Edgar, Edward Iacobucci, Alan Macnaughton, Felice Martinello, Lisa Philipps, Daniel Sandler, Michael Trebilcock, David White, staff at Statistics Canada and the Department of Finance, those in attendance at presentations of our earlier research paper at the University of British Columbia Faculty of Law and at the 2005 Tax Policy Research Symposium of the Deloitte Centre for Tax Education and Research at the University of Waterloo, and two anonymous referees for helpful comments and suggestions. Any errors or omissions are our own.
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426 n (2006) vol. 54, no 2
The Taxation of Strike Pay
Benjamin Alarie and Matthew Sudak*
P r é c i s
En 1990, dans l’arrêt Fries c. Sa Majesté la Reine, la Cour suprême du Canada a confirmé comme question de droit la pratique administrative de longue date de caractériser les allocations de grève comme un revenu non imposable compte tenu du fait qu’elles ne sont pas « un revenu […] dont la source » au sens de l’alinéa 3a) de la Loi de l’impôt sur le revenu. Aux États-Unis, par contre, les allocations de grève sont généralement assujetties à l’impôt sur le revenu, conformément à l’approche plus inclusive de la définition du revenu qui prévaut en vertu de l’article 61 de l’Internal Revenue Code. L’article examine en détail cette différence de politique fiscale. Dans le processus, les auteurs examinent la position d’autres pays devant des enjeux semblables, élaborent ce que l’on peut inférer à partir des conséquences fiscales et économiques probables de ne pas imposer les allocations de grève, et suggèrent certaines idées de réforme à l’intention des décideurs politiques canadiens.
A b s t r A c t
The Supreme Court of Canada in 1990 in Fries v. The Queen confirmed as a legal matter the longstanding administrative practice of characterizing strike pay as a non-taxable receipt by virtue of its not being “income . . . from a source” pursuant to paragraph 3(a) of the Income Tax Act. By contrast, in the United States, strike pay is generally subject to income tax, consistent with the more inclusive approach to defining income that predominates under section 61 of the Internal Revenue Code. This article examines in detail this tax policy difference. In the process, it canvasses the attitude of some other countries to similar issues, maps out what can be inferred about the likely fiscal and economic consequences of not taxing strike pay, and suggests some ideas for reform for Canadian policy makers.
KEYWOrDs: Income n labour dIsputes n strIkes n tax exemptIons n tax polIcy n unIons
InNewYorkCityonSeptember15,2004,GaryBettman,thecommissioneroftheNationalHockeyLeague(nhl),announcedaleague-widelockout1onaccountofstalledcollectivebargainingnegotiationswiththeplayers’association(thenhlpa).OnNovember24,2004,thenhlpaannounceditsintentiontopaylargemonthlystipends to the locked-out players.2 Following the announcement, the nhlpaadviseditsplayersthatthosewhoweresubjecttoincometaxintheUnitedStateswouldhavetoreportthestipendsastaxableincome,butthestipendswouldnotbesubjecttoincometaxinCanada.
ThedifferenceintaxpolicybetweenCanadaandtheUnitedStatesinthisregardisarresting.InCanada,adeductionfromemploymentincomeisavailableforan-nualduespaidtounions.Unionsthemselvesaretax-exemptorganizations,soanyinvestmentincomegeneratedbyfundsdivertedfromannualduesforaccumulationinastrikefundistax-exempt.Finally,strikepayhasbeentreatedbyCanadianreve-nueauthoritiesasnotbeingtaxable.ThisviewwasexplicitlyupheldbytheSupremeCourtofCanadain1990inFries v. The Queen,3wherethecourtdecidedthatstrikepaywasnot“income...fromasource”withinthemeaningofparagraph3(a)oftheIncomeTaxAct.4Asaconsequence,inCanada,amountsreceivedasstrikepaywill
c O n t E n t s
Introduction 427Canadian Tax Treatment of Union Dues, Union Investment Income, and Strike Pay 428Comparison with Other Countries 434
Australia 434United States 435United Kingdom 438New Zealand 439
Data 440Economic Effects 441Analysis of Policy Alternatives 444Conclusion 447Appendix Estimating Strike Pay Tax Expenditures for 1993 to 2004 448
c A n A Di A n tA x trE AtmEnt O f uniO n DuE s , uniO n in v E s tmEnt incOmE , A nD s triK E PAY
Atfirstglance,itmightseemthattheissueofthetaxtreatmentofstrikepayisabinaryquestion:“Isstrikepaysubjecttotaxornot?”However,togetacompletepictureofthetaxtreatmentofstrikepay,itisnecessarytoconsiderthecontextinwhichstrikepayisreceived.Thereareactuallythreedistinctlevelsofanalysisthataresalienttosettingoutthetaxtreatmentofpaymentsfromlabourorganizationstotheirmembersduringlabourdisputes.Atthefirstlevelofanalysisistheissueofthedeductibilityofmembership feesorunionduespaid to labourorganizations.Atthesecondlevel,thetaxstatusandtreatmentofthevariousactivitiesofthelabourorganization itself—especially the aggregation, accumulation, and investment offunds held in reserve for use during potential labour disputes—is relevant. Thefinallevelofanalysisisconcernedwithpaymentsmadebylabourorganizationsforthesupportofworkerswhohavebeenlockedoutorareonstrike—thatis,thetaxconsequencestotherecipientofstrikepay.
5 Thisbroadapproachwasfirmlyestablishedin1955bytheUnitedStatesSupremeCourtinCommissioner v. Glenshaw Glass Co.,348US426(1955).WarrenCJremarked,ibid.,at429-30,“Congressappliednolimitationsastothesourceoftaxablereceipts,norrestrictivelabelsastotheirnature.AndtheCourthasgivenaliberalconstructiontothisbroadphraseologyinrecognitionoftheintentionofCongresstotaxallgainsexceptthosespecificallyexempted.”
Thetaxadvantagesextendalsotothethirdandmostvisible levelofanalysis:thetaxtreatmentofstrikepayitself.OnMay5,1989,inajudgmentthatwouldultimatelybeoverturnedbytheSupremeCourtofCanada,theFederalCourtofAppealinFries16heldthat$880.80receivedbyWallyFriesinstrikepayfromtheSaskatchewanGovernmentEmployees’Unionwastaxableas“income...fromasource”underparagraph3(a)oftheita,andthereforeshouldhavebeenreportedasincomebyFries.Inthisrespect,theFederalCourtofAppealupheldtheassessmentoftheminister,whohadgoneagainstestablishedadministrativepracticeinarguingthatthestrikepaywastaxableasincome,probablybecauseFrieswasonasympa-thystrikeandthestrikepaywasmuchhigherthannormal.Infact,thestrikepayreceivedwasintendedtoprovidefullafter-taxwagereplacement.FriesappliedforleavetoappealtotheSupremeCourtofCanada.TheSupremeCourtunanimouslyallowedtheappeal,reversingthejudgmentoftheFederalCourtofAppeal.Inwhatis almost certainly the shortestSupremeCourtofCanada judgment to reverse ajudgmentoftheFederalCourtofAppealinataxcase,Sopinkajrenderedthecourt’sreasons—whicharereproducedinfullinthefollowingexcerpt—fromthebench:
Inourview, it is indeedunfortunatethatthecourtdidnotprovideadetailedanalysisofthereferenceto“income...fromasource”inparagraph3(a)oftheita.Notonlydidthecourtbypassanopportunitytoengagewiththeappropriateinter-pretationoftheprovision;italsofailedtoundertakeameaningfulanalysisofthedecisionoftheFederalCourtofAppeal,whichdisallowedthetaxpayer’sargumentthatthe$880.80paymentwasmerelyareturnofincome,onthebasisthatthefundshadbeencommingledandheldinacommonfund.Inaddition,inourview,theSupremeCourtshouldhaveaddressedthefactthatunionmembers’contributionsofuniondueshadalreadybenefitedfromdeductibilityandthatinvestmentreturnsofthestrikefundwereexemptfromtax.Inchoosingnottoprovidesubstantialrea-sons,thecourtappearstohaveignoredthecautionarywordsofUriejattheFederalCourtofAppeal,whowrotewithrespecttotheimportanceofthecase:
[w]hile statutory interpretationcannotproceedwithoutbackgroundnormsandas-sumptions, thesenormsandassumptionsshouldreflect thevaluesof thesocietyofwhichtheyareapart,notthoseofabygoneera.Forthisreason,aresidualpresump-tion in favour of the taxpayer, a lingering legacy of strict construction, is perhapslessconvincingthanaresidualpresumptioninfavourofpoliticalaccountabilityanddemocraticdecisionmaking....InFries v. The Queen,...wherethetaxpayerarguedsuccessfully that strike pay was not income from an unspecified source within themeaningofparagraph3(a)oftheAct,suchapresumptionwouldhavefavouredtheCrown,requiringlabourunionsandtheirmemberstojustifyaspecialexemptionforstrikepaynotwithstandingthatunionduesaredeductibleincomputingataxpayer’s
18 VernKrishna,The Fundamentals of Canadian Income Tax,8thed.(Toronto:Carswell,2004),133.
19 PeterW.Hogg,JoanneE.Magee,andJinyanLi,Principles of Canadian Income Tax Law,5thed.(Toronto:Carswell,2005),84.
20 Fries,supranote3,at5240;471(FCA).
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Thus,thedecisionmayalsodemonstratehowtheSupremeCourtofCanadaalmostimmediatelybegandriftingawayfromtheso-calledmodernapproachtotheinter-pretationoftheita(theapproachemphasizedinthecourt’sjudgmentinStubart Investments Limited v. The Queen)22infavourofthemoretraditionalstrictapproach,pursuant towhich failure to enumerate a sourceof incomewithin the ita leadsalmostinexorablytoajudgmentinfavourofthetaxpayer.23
Whatever its limitationsintermsoftheapparent lackofanalyticaldepthandrigourofexpression,aswellassuspectstatutoryinterpretation,theSupremeCourt’sjudgmentinFriesdidnotactuallychangeestablishedadministrativepractice.PriortothejudgmentinFries,thecra’sadministrativeposition,assetoutinInterpretation Bulletin it-334r,hadbeentoconsiderstrikepaynottobeincometorecipients,unlessithadbeenreceivedfromtheunionascontractualremunerationforservicesratherthanstrikepayperse.
It bears noting that interpretation bulletins are not—and do not purport tobe—dispositivewithregardtolegalissues.Rather,interpretationbulletinsattempttooutlinethecra’sinterpretationofthelaw,whichisnotbindingonthecourts.Interpretationbulletinsdonotevencommittheministertoassessingtaxpayersinaparticularway,25thoughitisthecra’spracticetodoso.
23 Similarapproacheshavebeenappliedinothercases,withsimilarresults.See,forexample,Schwartz v. The Queen,96DTC6103;[1996]1CTC303(SCC);Manrell v. The Queen,2002DTC1222;[2002]1CTC2543(TCC);andFortino et al. v. The Queen,97DTC55;[1997]2CTC2184(TCC);aff’d.2000DTC6060;[2000]1CTC349(FCA).
12. Amemberofaunionwhoisonstrikeorlockedoutneednotincludeinincomepaymentsof the type commonly referred to as “strikepay” that are received fromhisorherunion,evenifthememberperformspicketingdutiesasarequirementofmembership.InthedecisionoftheSupremeCourtofCanadainWally Fries v. The Queen,[1990]2ctc439,90dtc6662,paymentsbywayofstrikepaywereheldnottobe“incomefromasource.”Ontheotherhand,paymentsmadebyauniontoitsmembersforservicesperformedduringthecourseofastrikeareincludedinincomeifthememberisemployedbyorisaconsultanttotheunionwhetherpermanently,asamemberofatemporarycommitteeorinsomeothercapacity.Regularsalary,wagesandbenefitsreceivedbyemployeesofunionsaresubjecttotaxintheusualmanner.26
it-334r2 is still themostcurrent interpretationbulletinon the strikepay issue,and isunambiguouslycorrectasa legalmatter,pendingsomething further fromParliamentorfromtheSupremeCourtofCanadatodisturbthejudgmentofthecourtinFries.
n uniondues;n duespaidtotheCommissiondelaconstructionduQuébec;n duespaidtotheAssociationprofessionnelledeschauffeursdetaxiduQuébec;n duespaidtoarecognizedartisticassociationoraprofessionalassociationwhose
Non-profitorganizations such as tradeunions are exempt from income taxes inQuebec.28Andagain,mirroringthetreatmentofthefederalincometax,strikepayisnotincludedinincomeforQuebecincometaxpurposes.29
Theatotakesthepositionthatpaymentsfromstrikefundstounionmembersduring labour disputes are not assessable income. In the ato’s opinion, unionmembershavenorightorentitlementtothepayment,andbecausethepaymentismadeonthebasisoffinancialhardship,strikepaydoesnotsatisfytheordinaryunderstandingofincome.Morespecifically,theatoexplainsthatstrikingorlocked-outunionmemberswillgenerallyhave“noexpectationofreceivingregular,fixedpaymentsfromthestrikefund.”36However,ifforsomereasonamemberdoeshave“anexpectationof receivingregular,fixedpayments fromthestrike fund,and isaccordinglyable to relyon thepayments forhisorher regularexpenditure, thepaymentswillbeassessableincome.”37
United States
Theircallowsforthedeductibilityofunionduesasamiscellaneousitemizedde-ductionpursuant to section67.However, taxpayerswhochoose to itemize theirdeductionshavetoforgothestandarddeduction.Ordinarily,onlymiscellaneousdeduc-tionscumulativelyexceeding2percentofataxpayer’sadjustedgrossincomemaybetaken.38Thus,forthosewhopayunionduesbuttakethestandarddeductioninsteadofitemizingtheirdeductions,thereisnoexplicitallowancemadeforthededuct-ibilityofuniondues.Asignificantproportionofunionizedworkerstakeonlythestandarddeduction.AnalysisofdatacontainedintheCurrentPopulationSurvey
436 n canadian tax journal / revue fiscale canadienne (2006) vol. 54, no 2
(cps)39 and tax statisticsproducedby the InternalRevenueService (irs)40 showsthatmorethan40percentofhouseholdswithatleastoneunionizedemployeetakethestandardizeddeduction.Thisnumberissubstantiallylowerthanthepercent-ageofhouseholdswheretherearenounionizedemployees.Inhouseholdswithoutaunionizedmember,approximately70percentoftaxpayerstakethestandardizeddeduction.41
Thedefinitionof“grossincome”insection61(a)oftheircstates,“Exceptasotherwiseprovidedinthissubtitle,grossincomemeansallincomefromwhateversourcederived.”Theprovisionthenlistsexamplesofspecificamountsincludedingrossincome,referstosections71andfollowingasprovisionsdetailingspecificinclu-sions,andreferstosections101andfollowingasprovisionsdetailingspecificexclusions.Strikepayisnotexplicitlymentionedanywhereintheirc.However,thebroadin-terpretationthattheUnitedStatesSupremeCourthasgiventothephrase“grossincomemeans all income fromwhatever sourcederived,” in cases likeGlenshaw Glass,45hasbeenappliedbylowercourtstoincludestrikeandlockoutbenefits.Theprimarytaxpayerargumentinthereporteduscaselawonstrikepaytendstobethatthe strikepaywasgratuitous—that is, agift46—andshould thereforebeexcludedfromgrossincomeonthebasisofsection102(1)oftheirc,aprovisionthatexpresslyexcludesgiftsand inheritances fromgross income.Sincethequestionwhetheraparticulartransferofpropertyisagiftisaquestionoffactthatturnsonwhetherthetransferorwasmotivatedtoactoutof“detachedanddisinterestedgenerosity,”itisperhapsnotsurprisingthatsomecourtshavecharacterizedstrikepayasagiftincertaincircumstances.47However,itismorecommonlyheldthatstrikepayisnotagift.48Inthe1975caseofMadonna J. Colwell,49theTaxCourtenunciatedsixrele-vantfactorsfordeterminingwhetherstrikepayshouldbeconsideredagift.Thesefactors50include
1. whethertherewasamoralorlegalobligationtomakethepayments; 2. whether the payments were made upon a consideration of the recipient’s
bytheUnitedStatesSupremeCourtinUnited States v. Kaiser,363US299(1960).ItshouldbenotedthatthecourtinKaiserwasconstrainedbythejury’sfindingattrialthattheassistancewasrenderedtoaclassofpersonsinthecommunityineconomicneedandthatthestrikepaywasmotivatedprimarilybygenerosityorcharity.AnothercasethatconsideredwhetherstrikepaywasagiftunderthetestarticulatedinDubersteinwasStone v. Lynch,325SE2d230(1985),wheretheNorthCarolinaSupremeCourtconcludedthatthestrikepayinquestionwasproperlyconsideredagiftforthepurposesofNorthCarolinaincometaxation.
48 See,forexample,Richard A. Osborne,69TCM1895(1995). 49 64TC584(1975). 50 AsdescribedinOsborne,supranote48,at1901.
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4. whethertherecipientwasamemberofthestrikingunion; 5. whether thepayments required the recipient toperformany strikeduties
In the United Kingdom, annual subscription fees paid to specifically approvedorganizationsaredeductible fromemployment incomeunder section344of theIncomeTax(EarningsandPensions)Act2003(itepa).51AcurrentlistofapprovedorganizationsismaintainedbyhmRevenue&Customs(hmrc,formerlyInlandRevenue)andisavailableforpublicperusalontheInternet.52Whilethestatutoryframeworkseemstosuggestthattradeunionsmightbeabletogainhmrcapproval,few(ifany)tradeunionsappearontheapprovedorganizationslist.Thecurrentlistisdominatedbyprofessionalorganizations,suchasvarioussocietiesandorganiza-tionsforacademics,accountants,actuaries,architects,engineers,lawyers,medicalprofessionals,psychiatrists,psychologists,scientists,etc.
Historically,tradeunionsandemployees’associationshavebeenexplicitlyex-empted from income taxation—for example, by section 467 of the Income andCorporation Taxes Act 1988 (icta).53 However, trade unions are generally con-sidered to be companies for the purposes of the corporate tax.54 Under certainconditions,registeredtradeunionscanclaimrelieffromcorporatetaxinrespectofcertainnon-tradingincomeandchargeablegainsusedtomakeprovidentbenefitsavailable tomembers.55Registered tradeunionsare listedpursuant to theTradeUnionandLabourRelations(Consolidation)Act1992ortheIndustrialRelations(Northern Ireland) Order 1992.56 In practice, most trade unions are registeredunderoneoftheseacts.
Strikepay isnot subject to tax in theUnitedKingdom.According tohmrc,section19(1)oftheicta(whichhasbeensupersededbytheitepa)didnotextendtotheinclusionofstrikepayinincome.“SomeTradeUnionsmakepaymentstomemberswhoareonstrike.Suchpaymentsarenotemolumentsfromtheemploy-mentandarenottaxable.”57Apparentlytheitepahasintroducednosubstantivechangestothelawregardingthetaxationofstrikepay.
NewZealand’sapproachtothetaxationofstrikepayisnotperfectlyclear,butamountsreceivedasstrikepayarelikelynotassessable.Inordertobeassessable,strikepaywouldhavetobecharacterizedas“income”accordingtotheapplicabletest. Section ca 1(2) of the Income Tax Act 2004 provides that in addition toamountsspecifiedinthelegislationasincome,areceiptwillbeconsideredincomegenerallyifitis“incomeunderordinaryconcepts.”Tobecharacterizedasincomeunder“ordinaryconcepts,”strikepaywouldhavetobereceivedregularly(forex-ample,weeklyorbi-weekly)andbeexpected.However,ifthepaymentwasalumpsumor if theunionmadein-kindprovisionforstrikers, the“ordinaryconcepts”requirement would probably not be satisfied. A further argument against thesepaymentsbeingconsideredincome,accordingto“ordinaryconcepts,”isthattheunionisreturningunionduespaidbyitsmembers.Giventhatemployeesarenotallowedadeductionforunionduesexante, it isnotunlikelythatthisargumentwouldbedecisive.
Thefederalrevenuecost(taxexpenditureamount)ofthenon-taxationofstrikepay has not been officially estimated since 1992, when it was calculated in thegovernmentofCanada’s taxexpenditurereports tobe$9million.66However,by
Thereisalsoconsiderablevariationbycountryinthereportedfrequencyanddurationoflabourdisputes,partlyformethodologicalreasonsrelatingtothewaythedataarecollected,butalsoforvarioussocial,cultural,andeconomicreasons.67AccordingtostatisticscompiledbytheInternationalLabourOrganization,Canadawitnessedatotalof266strikesandlockoutsin2003,involvingalmost80,000work-ers.These interruptions accounted for a cumulative lossof1.74milliondaysofwork.68Bywayofcomparison,intheUnitedStatesin2003,therewere14strikesorlockoutslastingatleastonedayorshiftandinvolvingmorethan1,000workers,leadingto4.08millionlostworkdays.69In2003,theUnitedKingdomlost499,100daysofworkfrom133strikesandlockouts,andAustralialost439,400daysfrom643workstoppages.70
Amoresignificantquestioniswhethertaxingstrikepaywoulddecreasestrikeactivity, as suggested by Kesselman.71 Generally, theory would support this pre-diction.72Theseminalmoderneconomictreatmentofwhystrikes(andlockouts)
Althoughnoempiricalworkhasexaminedtheeffectsofstrikepaytaxationonstrikeactivity,thebasicideathatanincreaseincoststoonepartydecreasesstrikeactivityhasbeentestedinthecontextofwhetherprovidingemploymentinsurancebenefits(unemploymentinsuranceintheUnitedStates)tostrikersincreasesstrikeactivity.Theevidenceisdecidedlymixed.Hutchens,Lipsky,andSternhavefounda positive correlation between strike activity and the availability of governmentemploymentinsuranceprograms(whichwouldpresumablydecreasestrikecosts);
73 JohnR.Hicks,The Theory of Wages(London:MacMillan,1932),andJohnR.Hicks,The Theory of Wages,2ded.(NewYork:St.Martin’sPress,1966),specifically136-57.Kaufmanhasnotedthat“Hicks’stheoryhascometodominateeconomictheorizingonstrikes”:BruceE.Kaufman,“ResearchonStrikeModelsandOutcomesinthe1980s:AccomplishmentsandShortcomings,”inDavidLewin,OliviaS.Mitchell,andPeterD.Sherer,eds.,Research Frontiers in Industrial Relations and Human Resources(Madison,WI:IndustrialRelationsResearchAssociations,1992),77-83,at82.
notonly is strikepaya receipt indirectly related toemployment services, it is alsofinancedoutofemployees’tax-deductibleuniondues.Hence,itisinconsistentwithbothhorizontalequityandthetaxdeductibilityofunionduestoomitstrikepayfromtaxableincome.81
78 SeeRobertM.Hutchens,DavidB.Lipsky,andRobertN.Stern,Strikers and Subsidies: The Influence of Government Transfer Programs on Strike Activity(Kalamazoo,MI:UpjohnInstituteforEmploymentResearch,1989);RobertM.Hutchens,DavidB.Lipsky,andRobertN.Stern,“UnemploymentInsuranceandStrikes”(1992)vol.13Journal of Labor Research337-54;D.R.Maki,“TheEffectoftheCostofStrikeActivityontheVolumeofStrikeActivity”(1986)vol.39,no.4Industrial & Labor Relations Review552-63;SyedM.Ahmed,“TheEffectsoftheJointCostofStrikesinCanadianManufacturingIndustries—ATestoftheReder-Neumann-KennanTheory”(1989)vol.21,no.10Applied Economics1353-67;andPeterIngram,DavidMetcalf,andJonathanWadsworth,“StrikeIncidenceinBritishManufacturinginthe1980s”(1993)vol.46,no.4Industrial & Labor Relations Review704-17.
79 PeterKuhn,“UnionsandtheEconomy:WhatWeKnow;WhatWeShouldKnow”(1998)vol.31,no.5Canadian Journal of Economics1033-56.
astheexternalityreasonsgivenforsubsidizingresearchanddevelopmentorCan-adianfilms,would appear tobe absent in this context.Even theDepartmentofFinanceseemsunabletofindareasonforthecurrentpolicy;thelistingofgoalsoftaxexpendituresintheannualtaxexpenditureaccountsdoesnotrefertoanygoaljustifying thenon-taxationof strikepay,but simplyrestates the legalconclusionreachedinFriesthatstrikepayisnot“income...fromasource.”83
Onealternativetotaxationofstrikepayistoaddresstheproblemonthefrontend.Morespecifically,theremightbeareduceddeductionavailableforunionduesbasedontheproportionofunionduespaidintostrikefundsexante.Theideaisthatjustasspecialstrikeleviesarenotdeductible,theproportionofannualduesthatmakesitswayintostrikefundsshouldalsobenon-deductible.Thisnon-deductibleproportioncouldbecalculatedonaunion-by-unionandyear-by-yearbasis(withaone-or two-year lag); but for simplicity, a betteroptionwouldbe to create aCanada-widenon-deductibleproportionbasedon theaverageproportionofan-nual dues contributed to strike funds, which might be in the neighbourhood of5percent.89Professionalfees,whicharealsodeductible,wouldpresumablyretainafulldeductionsincenoprofessionsmaintainstrikefunds.Thisfront-endapproachisattractiveinthatitsolvesthecompliancecostproblem.However,itcreatesthewrongincentivesinthataCanada-widenon-deductibleproportioncouldnotaffectindividualunions’decisionsonstrikepay,andhencestrikepaywouldnotbetaxableatthemargin.
AsecondalternativeistofollowtheapproachofFinland,whichexemptsthefirst€16(approximately$22)90receivedinstrikepayperday.Strikepayabovethislevelisincludedinincome.91AsimilarpolicyinCanadawouldexemptthefirst$150ofstrikepayperweek.Thiswouldexemptmoststrikepay,whichseldomexceeds$250perweek.Thespecialadjustmentsrequiredforthefulltaxationofstrikepaymightnotbenecessary,becauseitwouldapplyinonlyaverylimitednumberofsituations.Thisapproachwouldsolvethecompliancecostproblemsinceonlyafewpeoplewouldhaveataxableamount.However, itmightnotbeperceivedassolvingtheverticalequityproblem.The$150perweekexemptiontranslatesinto$7,800peryear,whichislessthanthebasicpersonalamount.Also,taxationabovetheexemptamountwould raise very little revenue, and thehorizontal equity and efficiencyproblemsnotedabovewouldnotbesolvedformoststrikepayamounts.
Thetaxtreatmentofuniondues,labourorganizations,andstrikepayinCanadaraisesbothhorizontalequityandefficiencyconcerns,sinceitprovidesamechanismthroughwhichemploymentincomecanreturntounionmemberswithoutincurringincometax liability.TheUnitedStates, theUnitedKingdom,andNewZealandhaveadoptedconsiderably lessgenerousapproaches to the implicated taxpolicyissuesthanCanada,althoughAustraliahassimilarrules.Ouranalysisindicatesthattheannualtaxexpendituresinthiscountryarecurrentlyintheneighbourhoodof$15millionto$25millionperyear,withabout60percentattributabletofederaltaxexpendituresandtheremaining40percenttotaxexpendituresattheprovincial
91 SeeFinland,MinistryofFinance,Taxation in Finland 2001(Helsinki:MinistryofFinance,2001),25(online:http://www.vm.fi/tiedostot/pdf/fi/15626.pdf ).In2001,theamountexemptedwas€12.Ithassincebeenincreasedto€16.
A PPEnDi x E s tim Ating s triK E PAY tA x E x PEnDit urE s fO r 19 93 tO 20 0 4
Theofficialfederaltaxexpenditureestimatesarepresentedinthetablebelow.Theunofficialestimatesareourown.TheyarebasedonfiguresfromtheLabour Force Historical Review 200494relatingtothenumberofdayslostowingtolabourdisputesineachprovince, theratioofprovincial to federal incometax revenues,and thefederaltaxexpenditureestimatesoftheDepartmentofFinance.95
94 StatisticsCanada,Labour Force Historical Review 2004(CD-ROMdatabase),StatisticsCanadacatalogueno.71F0004XCB.WhilethesestatisticsvaryinmagnitudefromtheLaborstadata,thetrendsaresimilar.
95 TaxrevenuedatagatheredfromKarinTreffandDavidB.Perry,Finances of the Nation 2004(Toronto:CanadianTaxFoundation,2004),chapter3.Therevenuesutilizedarefromthe2002taxationyear.Itisassumedthattherehasbeennosignificantchangeintheratioofprovincialtaxrevenuestofederaltaxrevenueswithinaprovincesincetheearly1990s.
the taxation of strike pay n 449
Days Lost Owing to Labour Disputes and Estimated Strike Pay Tax Expenditures
a Officialestimatesarenotavailableforyearspriorto1979orfor1984-87.Sources:DataondayslostfromtheInternationalLabourOrganizationLaborstaDatabase(online:http://laborsta.ilo.org/),table9C,ISICrev.3.TaxlossfiguresfromCanada,DepartmentofFinancecalculations:1979-1983,Canada,DepartmentofFinance,Account of the Cost of Selective Tax Measures(Ottawa:DepartmentofFinance,August1985),42;1988-1989,Canada,DepartmentofFinance,Government of Canada Personal Income Tax Expenditures(Ottawa:DepartmentofFinance,December1992),11;1989-1991,Canada,DepartmentofFinance,Personal and Corporate Income Tax Expenditures(Ottawa:DepartmentofFinance,December1993),15;1992,Government of Canada Tax Expenditures 1995(Ottawa:DepartmentofFinance,1996),24.ProvincialtaxexpendituresbasedondatafromtheLabour Force Historical Review 2004(CD-ROMdatabase),StatisticsCanadacatalogueno.71F0004XCB;andKarinTreffandTedCook,Finances of the Nation 1995(Toronto:CanadianTaxFoundation,1995),3:3,table3.3.QuebecprovincialincometaxrevenuefromQuébec,MinistèredesFinances,1998-1999Budget,BudgetPlan,March31,1998,29,table2.15;federalincometaxrevenueforQuebecfromKarinTreffandDavidB.Perry,Finances of the Nation 1997(Toronto:CanadianTaxFoundation,1997),3:3,table3.3.Inflationdatafromthe“ConsumerPriceIndex”publishedbyStatisticsCanadaonbehalfoftheBankofCanada(online:http://www.bankofcanada.ca/en/cpi.html).Estimatedtotalprovincialtaxexpendituresarebasedon1992data,exceptforQuebec,whichuses1994data.