How tax rate differences across the country can pop up in unlikely places
Before my recent business trip to Nunavut, I hadn’t paid much attention to the fact that the territory is Canada’s lowest-taxed jurisdiction.
With a top territorial tax rate of only 11.5 per cent, the combined top marginal tax rate for a Nunavut resident maxes out at 44.5 per cent in 2018, nearly 10 percentage points lower than the top marginal rate in much of the Maritimes, Quebec and Ontario.
Coupled with the Northern Residents Deductions, there are clearly income tax advantages for individuals living in Nunavut to help compensate for the high cost of living in Canada’s North, and that difference can show up in some unlikely places.A recent New Brunswick Court of Appeal wrongful dismissal case dealt with whether an employee, who moved from high-tax New Brunswick to work for the Government of Nunavut in Iqaluit, should be compensated for the additional income tax she had to pay as a result of her damages award being taxed in New Brunswick, rather than in Nunavut.
In August 2007, the taxpayer, a resident of Saint John, N.B., decided to accept a three-year employment contract as a staffing consultant in Nunavut’s Department of Human Resources in Iqaluit, where she was tasked with hiring candidates for vacant positions within the territorial government.
During the job interview process, representatives of the government made reference to the income tax advantages associated with being employed in Nunavut. Once on the job, she was encouraged by her superiors “to bolster her recruitment efforts by informing candidates of the tax advantages associated with working in Nunavut.”
Jamie Golombek in Nunavut. Courtesy Jamie Golombek
In 2010, the government extended her employment contract for three additional years until August 2013, but she didn’t complete that contract because her employment in February 2011 was terminated “without cause.” She was required to vacate her employer-provided housing unit in Iqaluit and she then promptly returned to New Brunswick.
From 2007 through 2010, the taxpayer paid income tax on her earnings as a resident of Nunavut. Following her post-dismissal return to New Brunswick in early 2011, she paid income tax as a resident of New Brunswick. Had she remained employed for the duration of her contract, the taxpayer would have paid tax on her earnings as a Nunavut resident.
Initially, the government paid her a severance of about $23,500, but the taxpayer successfully sued for wrongful dismissal and received total damages of $438,000, consisting of a $225,000 advance payment in 2014 and the balance of $213,000 payable in 2017.
But the taxpayer also sought an additional $105,000 in further damages as compensation for the loss arising from her enhanced tax liability, which arose because the lump sum benefit payments would otherwise have accrued “in more modest amounts over multiple taxation years” and because of “the more onerous tax regime in New Brunswick.”
In a July 2017 decision, the lower court’s trial judge rejected the taxpayer’s claim for compensation for tax-related losses, saying the taxpayer’s argument on this issue “has no appeal to me. Tax consequences of the type at issue here are the result of differing federal and provincial tax regimes and the tax implications that flow from them … Each jurisdiction has its own complicated income tax structure. It is best left to those in the business of drafting or applying the income tax laws to resolve what tax a person is required to pay.”
The taxpayer appealed this decision to the appellate court, which overruled the lower court and found that the trial judge “committed a reversible error in denying compensation for the enhanced tax liability visited upon the (taxpayer) as a result of the premature termination of her fixed-term employment contract.”
The appellate court ruled the taxpayer was “legally entitled to be placed in the financial position she would have been in but for (the government’s) breach of the employment bargain. That state of affairs will not be achieved if she is denied compensation for the loss she sustained … in connection with the additional income tax generated.”
The court therefore ordered the Nunavut government to compensate her for the additional tax liability arising from the termination of her employment.