Principal Issues: What is the required withholding on a lump-sum amount received as a wrongful dismissal settlement?
Position: For payments made in Ontario, 10% should be withheld on any lump-sum settlement amount up to $5,000, 20% on the entire settlement if the amount is between $5,000 and $15,000 and 30% on the entire amount if the lump-sum payment is in excess of $15,000.
Reasons: The lump-sum settlement is generally considered a retiring allowance and the amount to be withheld can be found in subsection 103(4) of the Regulations.
XXXXXXXXXX
James Kerr
2010-038410December 2, 2010
Dear XXXXXXXXXX :
RE: Withholding on Lump-Sum Settlement
I am writing in reply to your letter dated October 18, 2010 concerning the required income tax withholding from a lump-sum payment received in a wrongful dismissal settlement. You have stated that your former Ontario employer withheld XXXXXXXXXX % from a termination amount of $XXXXXXXXXX .
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.
A lump-sum amount received in a wrongful dismissal settlement is generally considered a "retiring allowance". In accordance with the definition found in subsection 248(1) of the Income Tax Act (the "Act"), a retiring allowance includes a payment received "in respect of the loss of employment (including amounts received as damages or under an order or judgement of a competent tribunal)."
A retiring allowance is included in computing the income of a taxpayer when received in accordance with subparagraph 56(1)(a)(ii) of the Act. Pursuant to paragraph 153(1)(c) of the Act, a person paying a retiring allowance is required to withhold income tax therefrom in such amount as prescribed by the Income Tax Regulations (the "Regulations").
In accordance with subsection 103(4) of the Regulations, the rate of withholding on a lump sum payment is generally dependant on where the employee reports for work. In a case where an employee reports for work in Ontario, the following combined federal and provincial withholding tax rates are, in general, 10% for amounts not exceeding $5,000, 20% on the entire amount for amounts exceeding $5,000 but not exceeding $15,000, and 30% on the entire amount for amounts exceeding $15,000. There is no requirement for Canada Pension Plan contributions or Employment Insurance premiums to be withheld. Since the lump sum payment you received was $XXXXXXXXXX , your former employer was required to withhold 20%. For additional information, please refer to Guide RC4157, Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary.
We trust these comments will be of assistance.
Yours truly,
Randy Hewlett
Manager
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
