In the world of USA federal tax, there is a principle called the "claim of right doctrine" which basically says that earnings received by a taxpayer must be included in income if the taxpayer has control over the disposition of the earnings, even if the taxpayer might not in fact be entitled to the money.
North American Oil v. Commissioner,
286 US 417, 424 (1932). Under this American regime, the money being later repaid does not change the fact that the amount was properly included as income in the taxable year of receipt.
Batchelor-Robjohns v. United States,
788 F 3d 1280, 1292 (11th Cir 2015).
In Canada, the Income Tax Act,
RSC 1985, c 1 (5th Supp) ("ITA") does not explicitly address the inclusion in income of amounts subject to contingencies, but the ITA arguably addresses this topic by implication. Specifically, the ITA states that an employee may take a deduction for "an amount paid ... pursuant to an arrangement ... under which the taxpayer is required to reimburse any amount paid to the taxpayer for a period throughout which the taxpayer did not perform the duties of the office or employment", subject to certain conditions. ITA § 8(1)(n). The fact that such a deduction is available seemingly suggests that the original amount was properly includible in income even though it was subject to a provisio for repayment (because otherwise the deduction would be unnecessary, since the taxpayer could just amend the original year to remove the amount).
The Canadian case law on this topic is surprisingly scant, but it appears to confirm the above analysis.
In
Théberge v. Canada (Minister of National Revenue),
2003 TCC 97, the Tax Court of Canada considered the case of one Mr. Théberge who received certain amounts in 1997 from his employer subject to a proviso for possible repayment. He was subsequently required to repay those amounts in 2002. Because of the requirement of repayment, Mr. Théberge argued that the amounts received in 1997 were not income and were nontaxable. The Court rejected this argument. To reach its decision, the Court considered and adopted the American authorities on the claim of right doctrine and thus concluded that:
| | ... it can be seen that Mr. Théberge's obligation to repay the city of Montréal the amounts ... is not sufficient to conclude that the wages paid to him ... no longer had the quality of income. Mr. Théberge had full use of the amounts paid by the city of Montréal. He could dispose of them as he saw fit. Nor did the amounts paid constitute a loan; they were indeed wages, as the paycheque stubs adduced at the hearing by Mr. Théberge himself indicate. |
Théberge at ¶ 21 (empahsis mine).
Citing
Théberge, the Tax Court of Canada also came to the same conclusion in
Harnish v. Canada (Minister of National Revenue),
2007 TCC 546 at ¶¶ 9-11, where it was held that "a condition subsequent which [does] not affect [the taxpayer's] ability to use the funds for any particular purpose or in any particular manner" does not prevent an amount from being included in income.
From the above principles, it appears that the repayment in 2016 of maternity leave top-up received in 2015 does not affect the 2015 tax year, and the amounts received in 2015 are still properly included in income for 2015, and the taxpayer cannot receive a refund for the 2015 tax year for the tax paid in respect of those amounts. However, a deduction may be available in 2016 for all or part of the repayment under ITA § 8(1)(n) or another provision, if all of the conditions for the relevant deduction are met. The law does not guarantee that this deduction will completely reverse the effect of the tax paid for 2015.
