Surrogatum, Source, and Tsiaprailis: Is There a Principled Basis for the Tax Treatment of Replacement Payments?

The decision of the Supreme Court of Canada in Tsiaprailis v. The Queen raises numerous questions regarding the proper limits of the law pertaining to the taxation of replacement payments from both doctrinal and policy perspectives. In that decision, the surrogatum principle was, for the first time,...

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Bibliographic Details
Published in:Canadian tax journal 2006-10, Vol.54 (4), p.862-906
Main Author: O'Brien, Martha
Format: Article
Language:English
Subjects:
Compensation
Disability insurance
Employment
Exclusion
Human rights
Income Tax Act-Canada
Income taxes
Injuries
Liability
Lump sum
Payments
Settlements & damages
State court decisions
Stock options
Strikes
Studies
Supreme Court decisions
Taxation
Wrongful discharge
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Summary:The decision of the Supreme Court of Canada in Tsiaprailis v. The Queen raises numerous questions regarding the proper limits of the law pertaining to the taxation of replacement payments from both doctrinal and policy perspectives. In that decision, the surrogatum principle was, for the first time, clearly extended beyond payments that replace business or property income or proceeds of disposition of a capital property used in a commercial context. This article examines what the implications might have been if Tsiaprailis had been decided in 1975 instead of 2005, by looking back at two types of compensation payment that the courts formerly excluded from taxation: wrongful dismissal damages and payments for cancelled stock options (which are now taxed under subsequent amendments to the Income Tax Act). Looking to the future, the article considers whether Tsiaprailis will lead to changes in the taxation of strike pay and damages for personal injury or human rights violations. The policy implications of extending the surrogatum rule into new areas are assessed, together with the post-Tsiaprailis cases that have applied the rule in new ways. [PUBLICATION ABSTRACT]
ISSN:0008-5111