Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether general damages of $XXXXXXXXXX paid to each XXXXXXXXXX former employees (the "Plaintiffs") of XXXXXXXXXX qualify as a "retiring allowance", as defined in subsection 248(1).
Position TAKEN:
The damages qualify as a retiring allowance.
Reasons FOR POSITION TAKEN:
The damages of $XXXXXXXXXX awarded to the Plaintiffs are clearly in respect of the loss of employment of the Plaintiffs, as these amounts were awarded because of the sudden, without cause and public dismissal of the Plaintiffs.
November 3, 2000
XXXXXXXXXX Tax Services HEADQUARTERS
Business Window - Client Services M. Azzi
957-8972
Attention: XXXXXXXXXX
2000-002816
XXXXXXXXXX
- Damages Payment
This is in reply to your memo of May 19, 2000, requesting our views on the tax treatment of damages in the amount of $XXXXXXXXXX paid to each of XXXXXXXXXX former employees (the "Plaintiffs") of XXXXXXXXXX . These damages were awarded by the XXXXXXXXXX.
Our understanding of the facts is as follows:
XXXXXXXXXX.
9. The Plaintiff's legal representative is of the view that the $XXXXXXXXXX award for damages is non-taxable based on the reasoning in the cases of Louis-Philippe Bedard (TCC), 91 DTC 573, and Sylvia Mendes-Roux (TCC-Informal procedure), [1998] 2 C.T.C. 2274.
Generally, compensation received by an individual from the individual's former employer on account of damages is either employment income, a retiring allowance or non-taxable damages. Such a determination is a question of fact which requires a review of all relevant facts and documentation of each particular case.
The term "retiring allowance" is defined in subsection 248(1) of the Income Tax Act (the "Act"), in part, as "an amount...received...in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal." The Supreme Court of Canada found in Savage, 83 DTC 5409 and Nowegijick, 83 DTC 5041 that the words "in respect of" are "... of the widest possible scope. They import such meanings as 'in relation to', 'with reference to' or 'in connection with'. The phrase 'in respect of' is probably the widest of any expression intended to convey some connection between two related subject matters." Accordingly, it is our view that, for example, damages received as compensation for mental distress suffered by an individual as a result of the loss of his or her employment are taxed as a retiring allowance. On the other hand, if the damages are unrelated to the loss of employment, they generally will not qualify as a retiring allowance.
In the above situation, in our view, the damages of $XXXXXXXXXX awarded to the Plaintiffs are clearly in respect of the loss of employment of the Plaintiffs, as these amounts were awarded because of the sudden, without cause and public dismissal of the Plaintiffs. Consequently, it is our view that these damages qualify as a "retiring allowance", as defined in subsection 248(1) of the Act.
In our view, the facts in the above situation can be distinguished from those of the Bedard case. In that case, the damages related to the fact that following the employee's dismissal, the reasons for his dismissal were released to the media. Accordingly, in Bedard, the damages related to the former employer's actions which were subsequent to the dismissal, such that the damages relating to the defamation caused by the subsequent release of information were not considered to arise from the loss of employment. It should also be noted that, in Bedard, the Court based its decision on the terms of a settlement agreement which, it admitted, were ambiguous. As regards the Mendes-Roux case, in our view, it offers little or no support, as in that case it appears that the details of the settlement were not released to the Court, and the cause of the mental distress (for which the Court concluded that damages were paid) is unclear. Arguably, in that case, the mental distress was caused by events leading (prior) to the dismissal, being the attempted relocation of the employee to another city because her supervisor allegedly suspected that she had knowledge of his being involved in "less than proper activities" and he was concerned that she would disclose this information if she were to stay in her current position.
In our view, our above position for including the $XXXXXXXXXX damages received by the Plaintiffs as a retiring allowance is supported in jurisprudence. For instance, in the case of Alexandra Stolte (TCC-Informal procedure), [1996] 2 C.T.C. 2421, in finding that $5,941 of damages for mental and physical injuries paid to the taxpayer were not a retiring allowance the Court stated, at pages 2424 and 2425:
"On the evidence I find as a fact that this amount was for damages, not for the loss of Mrs. Stolte's employment, but as damages for the mental and physical injuries she sustained by reason of the insensitive, arrogant and wholly unacceptable treatment that she suffered at the hands of her employer prior to the termination of her employment...It cannot reasonably be regarded as damages or compensation for the loss of her employment, or as damages for the stress, medical or psychological injuries she sustained as the result of the termination of her employment...I am satisfied that the sum of $5,941 represented damages for the injuries the appellant sustained by reason of the conduct of DDC's employees while she was an employee." (underlining for emphasis)
These comments support the position that had the mental or physical injuries resulted from the loss of employment, they would have fallen within the ambit of a "retiring allowance" as defined in subsection 248(1) of the Act. In addition, in the case of Gregory Anderson (TCC), 98 DTC 1190, in finding that $42,345 in damages relating to real estate commission, legal fees and moving expenses qualified as a retiring allowance, the Court indicated (at page 1192) that: "In determining whether the damages received by the appellant were a retiring allowance, the word 'in respect of' in paragraph 248(1)(b) direct that a broad scope of inclusion be considered as to what constitutes a sufficient connection between the loss of employment and the amounts received." The Court went on to find that the damages qualified as a retiring allowance, as the receipt of the damages was not "extraneous" to the loss of employment.
Finally, we would also note that in John James Young (TCC), 86 DTC 1567, damages for mental distress and exemplary damages were found to be "in respect of the loss of an office or employment" and therefore found to qualify as a retiring allowance.
The Plaintiffs' legal representative is of the view that the damages of $XXXXXXXXXX should not form part of the retiring allowance because the Plaintiffs were defamed. While we remain of the view that these damages qualify as a retiring allowance for the reasons explained above, we would also note that we agree with your view that this situation does not involve defamation. Black's Law Dictionary defines "defamation" as "An intentional false communication, either published or publicly spoken, that injures another's reputation or good name". The Concise Oxford Dictionary defines "defame" as "attack the good reputation of: speak ill of". In our view, these definitions seem to contemplate intentional and malicious actions and written or spoken false statements, and these elements do not appear to be present in the above situation. In this regard, we note that, in its decision to not award exemplary damages to the Plaintiffs, the XXXXXXXXXX notes,
XXXXXXXXXX
In closing, while the issue has not been raised, we would also note that, in our view, the special damages noted in 8 above are, by virtue of subsection 6(3) of the Act, employment income to the Plaintiffs. In this regard, we refer you to paragraph 4(c) of Interpretation Bulletin IT-196R2 which indicates that subsection 6(3) of the Act applies to "A payment received on the termination of employment, where the contract of employment either expressly or implicitly provides that the payee is entitled to receive such payment on account of, in lieu of payment of, or in satisfaction of the employer's obligation to pay his salary, wages, commissions, etc., remaining under the contract of employment..." Similarly, paragraph 7 of Interpretation Bulletin IT-337R3 states, in part, that "A payment received....in respect of a loss of employment pursuant to the terms of an employment contract with a former employer is generally viewed as remuneration from the former office or employment." In the above case, the XXXXXXXXXX awarded the special damages as it found that these amounts were due under the employment contract. That is, the XXXXXXXXXX found that, as the Plaintiffs were dismissed for reasons other than those specifically provided for in the termination clause noted in 2 and 8 above, they were entitled, under the terms of the employment contract, to remuneration for the rest of the term of the contract. This is expressed in various paragraphs throughout the decision.
XXXXXXXXXX
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.
We trust that these comments will be of assistance.
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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