Pay Equity Windfall

January 2000

In October 1999, an agreement was finally reached to settle the 16-year-old dispute over pay equity in female-dominated positions of the federal civil service. As a result, approximately 230,000 current and former federal government employees - mostly women - will be receiving a combined payout of retroactive salary plus interest estimated at $ 3.6 billion!

How it works

If you were employed by the federal government between March 8, 1985 and now, in any of the affected groups, you could be entitled to receive as much as $30,000 or more !

The total will be paid out in two cheques for the salary portion plus an additional cheque for interest. All payments will be made in 2000, starting in April.

If you are a former employee or pensioner, it would be wise to ensure that your department has your current address. If you do not know how to contact them, you can call the pay equity hotline at 1-888-346-8886.

Tax implications

A lump sum payment of this kind can have extensive tax implications depending on your individual situation. Since the government will not be providing any financial counseling, you should consult a financial adviser. Here are some points to consider.

Both the employment income and the interest portion of the payment are taxable in 2000 (the year received). Only the employment portion will be subject to deductions at the source including income tax, QPP (Quebec Pension Plan) and EI (Employment Insurance premiums). That means the interest portion will be paid in full requiring recipients to pay any tax owing when filing their 2000 personal income tax return. This could spell unwelcome surprises at tax time 2001, so beware!

You can defer taxes on the interest component by contributing the full amount to your RRSP (provided you have the contribution room to do so) at anytime up to the end of February 2001. The government has also made provisions to waive tax deductions on the salary portion for amounts contributed directly to an RRSP. You can put up to $10,000 - possibly more on request- into an RRSP and defer tax on the full amount. (Note: QPP and EI would still have to be deducted.)

Effects on government benefits

There are a number of government benefits which are tied to net income and could be lost as a result of a pay equity payment. Child tax benefits, GST and PST credits, OAS (including the Guaranteed Income Supplement) or any provincial social assistance payments could all be reduced. In some situations, you may even have to repay benefits you have already received. You could also look at losing some or all of non-refundable tax credits such as the age and spousal amounts as well as credits for medical expenses.

Since all of these credits and benefits are based on net income, the best way to preserve your eligibility is to reduce your net income with an RRSP. Before making any decisions, consult your financial advisor to ensure you get the most out of your pay equity settlement.