26 May 1998 External T.I. 9801025 - RETIRING ALLOWANCE V PAY IN LIEU OF NOTICE

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:

How are amounts related to required notice of termination treated when they are paid as a result of a court order or by settlement.

Position:

Taxed as employment income unless they are awarded as damages in which case they are treated as retiring allowances. Settlements are treated similarly.

Reasons:

Amounts paid in respect of the terms of employment contacts are treated as employment income. Where an amount is not paid under the contract but is awarded as damages for wrongful dismissal they fall into the retiring allowance definition.

XXXXXXXXXX 980102
W. C. Harding

Attention: XXXXXXXXXX

May 26, 1998

Dear Sirs:

Re: Retiring Allowance
Subsection 248(1) of the Income Tax Act (the “Act”)

This is in reply to your letter of January 16, 1998, in which you requested clarification of whether an amount paid to a former employee pursuant to a court order would be a retiring allowance where the amount is the minimum amount payable under the applicable provincial labour standards legislation. You also asked if a court ordered payment of a further amount in excess of the minimum required would be a retiring allowance.

The Department’s position with respect to the payment of an amount relating to a statutory notice of the termination of employment is published in Interpretation Bulletin IT-196R2 and in particular paragraph 4 thereof. A payment in lieu of earnings for a period of reasonable notice which is made by virtue of the terms of an employment contract (whether implied or explicit) will be treated as employment income and not as a retiring allowance. Requirements of employment standards legislation are terms of the employment contract and a payment relating to the legislation’s minimum notice requirement is therefore also a term of the employment contract. If the parties to the contract agree during any negotiations after termination that the former employee is entitled to a notice period greater than that provided by the employment standards legislation, then a payment in lieu of such additional notice is also employment income since the employee’s right to it was an implicit term of the employment contract.

If a court awards damages as the result of a successful wrongful dismissal suit, the damages are considered a retiring allowance in accordance with paragraph (b) of the definition of retiring allowance in subsection 248(1) of the Act. The Department also takes this view with respect to an amount paid by a former employer where legal action has been taken but the parties settle out of court.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate