16 October 2003 External T.I. 2003-0014105 - TAX-FREE HUMAN RIGHTS AWARDS

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Can a portion of the amount to be received on settlement of a wrongful dismissal action, be treated as tax-free damages received as a consequence of a Human rights violation?

Position: Question of fact.

Reasons:

The information provided to us indicates that the agreed settlement was reached by the parties to settle the taxpayer's claim that, as a result of the employer's discriminatory treatment of the employee, the employer had violated subsection 13(1) of the Human rights Code 1996 RSBC Chapter 210. The particulars of the claims submitted to us provided significant details of the alleged actions of the employer that preceded the employee's apparent termination. Based on this information it was not clear to us that a violation of the above noted section of the Act had occurred. However, it seemed clear that a personal injury did occur and that it was related to the employee's treatment while employed such that a strong case could likely be established that the damage payment would be to settle a human rights violation. Accordingly, we concluded that we could likely accept that a portion of the amount could be treated as tax free damages. We noted that we understood that the awards generally provided by the B.C. Human Rights Tribunal fell between $2,500 and $4,000 and that the largest award for general damages ever provided was $7,500.

XXXXXXXXXX 2003-001410
W. C. Harding
October 16, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX (the "Taxpayer")

This is in reply to your letters of February 25 and August 5, 2003 in which you requested an advance income tax ruling with respect to certain proposed payments that may be made to the above noted Taxpayer in settlement of an action commenced by the Taxpayer.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. Since your request for an advance ruling was not completed in accordance with the directions in the above noted circular, we cannot provide any income tax rulings at this time. However, we have reviewed the material submitted and are prepared to provide the following comments that may be of assistance to you. Please note that these comments are general in nature and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

Paragraph 9 of CCRA's Interpretation Bulletin IT-337R3 Retiring Allowances described the conditions under which CCRA is prepared to accept a settlement for damages of a human rights violation as a tax-free receipt and states that "when a loss of employment involves a human rights violation and is settled out of court, a reasonable amount in respect of general damages can be excluded from income."

Paragraph XXXXXXXXXX of The Statement of Claim dated XXXXXXXXXX, submitted with your request states:

"The Plaintiff pleads Section 13(1) of the Human Rights Code 1996 RSBC Chapter 210 as a result of the Defendants' discriminatory treatment of him which is in violation of the said statute and entitles the Plaintiff to damages for its breach."

Section 13(1) of the Human Rights Code 1996 RSBC Chapter 210 (the "Code") provides as follows:

"A person must not

(a) refuse to employ or refuse to continue to employ a person, or

(b) discriminate against a person regarding employment or any term or condition of employment

because of the race, colour, ancestry, place of origin, political belief, religion, marital status, family status, physical or mental disability, sex, sexual orientation or age of that person or because that person has been convicted of a criminal or summary conviction offence that is unrelated to the employment or to the intended employment of that person."

While we have not been able to identify, on the basis of the information submitted, any representations that link the alleged actions to an act of discrimination as itemized in section 13(1) of the Code, we accept that the alleged actions of the employer are significant and that the proposed payment may represent a valid claim for the settlement of an alleged human rights violation. Accordingly, we are of the opinion that a portion of the damages could be treated as a tax-free amount of general damages in settlement of a human rights violation as contemplated under paragraph 9 of the above-noted Bulletin.

With respect to the amount that may be treated as a tax-free award, we note that the B.C. Human Rights Tribunal Information Sheet entitled Remedies at the Human Rights Tribunal, indicates under the heading "Compensation for Injury to Dignity, feelings and self respect" that, "the amount awarded is generally comparable to other cases with similar circumstances" and that "To date, the most the tribunal has awarded under this heading is $7,500 though there is no limit in the Code on the amount that can be awarded."

We also noted in our review of various B.C. Human Rights Tribunal decisions available on the internet, that most comparable cases provided awards that ranged from $2,500 to $4,000. Accordingly, we would generally not expect that an amount in excess of $7,500 could be treated as a tax-free receipt under B.C. Human Rights legislation and that, in general, such awards and settlements would not exceed $4,000 unless there were exceptional circumstances.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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