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.
Principal Issues: 1) Determine whether the amounts paid meet the definition of "qualifying amount" in subsection 110.2(1) of the Act.
2) Determine whether the amounts paid for pain and suffering are taxable.
3) Determine the date in which the right to the amounts is established.
4) Determine whether Regulation 100(3) applies.
Position: 1) Yes, the amounts paid as "lost wages" will meet the definition of "qualifying amount" in subsection 110.2(1) of the Act.
2) No, the amounts paid for pain and suffering are not taxable to the recipients.
3) The date the settlement agreement is ratified.
4) Yes, provided the employee certifies with the employer that the amount or a portion of the amount is being contributed to an RRSP.
Reasons:
1) The amounts paid as "lost wages" are amounts received pursuant to a contract by which the payor and the individual terminate a legal proceeding.
2) These amounts represent general damages for pain and suffering which are not required to be included in income pursuant to our IT-365R2.
3) The determination date is the ratification date. This is the day that the legal proceeding is terminated and the right to the amounts are established.
4) Wording in the Regulations.
XXXXXXXXXX 2006-016550
XXXXXXXXXX, 2006
Dear XXXXXXXXXX:
Subject: Income Tax Ruling - XXXXXXXXXX
Business Number: XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above named company, on the consequences under the Income Tax Act of the proposed transactions described herein.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request:
i. is in an earlier return of a taxpayer or a related person;
ii. is being considered by a tax services office or taxation centre in connection with a previously filed tax return of a taxpayer or a related person;
iii. is under objection by a taxpayer or a related person;
iv. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
v. is the subject of a ruling previously issued by the Canada Revenue Agency (hereafter, the "CRA").
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the relevant facts, proposed transactions and the purpose of the proposed transactions is as follows:
Definitions
XXXXXXXXXX
"CHRA" means the Canadian Human Rights Act.
"CHRC" means the Canadian Human Rights Commission.
"CHRT" means the Canadian Human Rights Tribunal.
"Employee" means a person employed by the Employer XXXXXXXXXX.
"Employer" means XXXXXXXXXX a corporation incorporated under the Canada Business Corporations Act.
XXXXXXXXXX.
Facts
1. The Employer files its income tax return at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Service Office. The Employer's business number is XXXXXXXXXX.
2. On XXXXXXXXXX filed a complaint with the CHRC against the Employer. XXXXXXXXXX.
3. XXXXXXXXXX.
4. On XXXXXXXXXX, the CHRC issued an investigation report (the "Report"). XXXXXXXXXX.
5. XXXXXXXXXX.
6. By letter dated XXXXXXXXXX, the CHRC informed the Employer that it had decided to refer the complaints XXXXXXXXXX to the CHRT. The CHRC requested the President of the CHRT to name a tribunal to hear these complaints by letter dated XXXXXXXXXX.
7. The President of the CHRT, as required by the CHRA, named a tribunal to hear the complaints against the Employer (XXXXXXXXXX). XXXXXXXXXX.
8. XXXXXXXXXX.
9. XXXXXXXXXX.
10. XXXXXXXXX.X
11. In the hearing XXXXXXXXXX claimed damages for pain and suffering, as originally described in its Statement of Case dated XXXXXXXXXX did not specify the amount of claim for each Employee.
12. XXXXXXXXXX.
13. XXXXXXXXXX.
14. XXXXXXXXXX.
15. Between XXXXXXXXXX mediation sessions were held XXXXXXXXXX. At the mediator's request, XXXXXXXXXX set out its claims for pain and suffering damages under paragraph 53(2)(e) of the CHRA XXXXXXXXXX.
16. The mediation process resulted in the signing of a term sheet on XXXXXXXXXX (the "Term Sheet") and in the signing of a settlement agreement between the parties shortly thereafter (the "Settlement Agreement"). XXXXXXXXXX.
17. The Settlement Agreement covers approximately XXXXXXXXXX Employees and covers a period of XXXXXXXXXX (the "Settlement Period").
Proposed Transactions
18. XXXXXXXXXX.
19. Concurrently with the termination of the proceedings and according to the terms of the Settlement Agreement, the Employer will pay a total of $XXXXXXXXXX to the Employees by way of settlement of all XXXXXXXXXX claims and/or complaints against the Employer for "lost wages" as defined in subsection 11(7) of the CHRA. Each Employee will become entitled to a payment only upon the Employer's acceptance of the Employee's signed individual release. The maximum payment per Employee for lost wages in respect of the Settlement Period is $XXXXXXXXXX.
20. Under the terms of the Settlement Agreement, the Employer will pay, in addition to the amount referred to in Paragraph 19 above, a total of $XXXXXXXXXX to the Employees as damages in settlement of the claim for pain and suffering as claimed by XXXXXXXXXX, pursuant to paragraph 53(2)(e) of the CHRA. This amount will be divided as follows: XXXXXXXXXX. The payments described above will not be treated as pensionable earnings, nor will they be taken into account in calculating the defined benefit under the Employer's pension plan.
21. XXXXXXXXXX.
Purpose of the Proposed Transactions
22. The purpose of the proposed transactions by the Employer is to settle the claims made by XXXXXXXXXX for the alleged violations under the CHRA.
Rulings Given
Provided that:
a) The preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;
b) The proposed transactions are completed in the manner described above; and
c) There are no other transactions, which may be relevant to the rulings requested,
our rulings are as follows:
A. The amount to be paid to each Employee under the Settlement Agreement for lost wages as described in Paragraph 19 above will be a "qualifying amount" as defined in subsection 110.2(1) of the Act, provided the amount received is $XXXXXXXXXX or more.
B. The amount to be paid to each Employee under the Settlement Agreement for pain and suffering as described in Paragraph 20 above will not be required to be included in the Employee's income under the Act.
C. Where an Employee dies prior to the date on which the Settlement Agreement is ratified, any amount paid under the Settlement Agreement to the Employee's estate or the beneficiaries of an Employee's estate will not be required to be included in the income of the recipient under the Act.
D. Where an Employee certifies directly with the Employer, that the amount paid by the Employer under the Settlement Agreement for lost wages as described in Paragraph 19 above, or a portion thereof, is being contributed to a registered retirement savings plan ("RRSP"), pursuant to subsection 100(3) of the Income Tax Regulations, the Employer will not be required to withhold income tax on the amount paid or portion thereof that is contributed to the RRSP .
Opinions
We agree that instead of Form T1198 the Employer may provide a letter to the Employees in respect of the amounts to be paid under the Settlement Agreement for lost wages, verifying that the payment is a qualifying amount as defined in subsection 110.2(1) of the Act. This letter must contain all the information otherwise required on Form T1198.
Caveats
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the CRA provided the proposed transactions are carried out on or before XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.
Nothing in these rulings should be construed as implying that the CRA has agreed to or reviewed the fair market value of any amount referred to herein.
Yours truly,
XXXXXXXXXX
For Director
Business and Partnerships Division
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2006
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2006
Email this Content