13 January 1986 Income Tax Severed Letter A-1960 - Taxability of an out-of court settlement

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.

XXXX

D.Y. Dalphy 993-7295

January 13, 1986

Dear XXXX

This is in reply to your letter of October 7, 1985 concerning the taxability of an out-of court settlement accepted by a claimant and ex-gratia payments made to individuals with the approval of the Governor in Council.

Based on the information contained in the above-noted letter and attachments thereto, it appears that these amounts would not be included in calculating the income of recipients for a taxation year.

With regard to the out-of-court settlement, we would indicate that, in our view, this payment could not be considered an amount received "... as, on account or in lieu of payment of, or in satisfaction of a benefit under the Unemployment Insurance Act, 1971" (subparagraph 56(1)(a)(iv) of the Income Tax Act). Rather, it appears that the lump sum payment approved by either the Treasury Board or the Governor in Council was an amount paid to obtain a full and final settlement of a complaint filed with the Canadian Human Rights Commission. That is, it is our opinion that this amount was paid to the complainant as a result of an agreement among all parties involved and not as a benefit under the Unemployment Insurance Act, 1971 (the "Act").

The fact that this payment was calculated with reference to the amount of the benefit which the complainant would have received under the Act had she qualified thereunder is not determinative of the true source of the payment. In fact, had this matter proceeded to the Canadian Human Rights tribunal (the "tribunal"), the Crown's position was to be that the tribunal could not have made an order for the payment of benefits under the Act because the benefits which were already paid to the complainant were in accordance with the legislation which was in force at that time. In our view, it seems clear that the payment was made to the complainant in order to avoid inconvenience and the expenditure of public funds in contesting the matter before the tribunal.

With regard to the ex-gratia payments, although it appears that such amounts would not be included in calculating the income of recipients, we cannot provide you with a definitive opinion as we do not have sufficient information. As such, we provide the following general comments.

The primary focus in determining whether such amounts were received pursuant to subparagraph 56(1)(a)(iv) of the Income Tax Act is upon how the amounts were received. If, for example, an amount is paid as a result of an applicant completing and receiving approval of an Application for Benefit form, such a payment must be included in the income of the recipient, irrespective of the applicant's ultimate entitlement to receive payment or any provision for later reimbursement to the Unemployment Insurance Commission. In this regard, you may wish to make reference to the case, Rowley v. M.N.R. (1982),

82 DTC 1226 (Tax Review Board). In our view, if an applicant received benefits under the Act which were in excess of those benefits to which he was legally entitled and if the Unemployment Insurance Commission waived the repayment of such excess benefits, the full amount of the benefit would be included in calculating the recipient's income for a taxation year.

If, however, the amounts are received by individuals as gifts or ex-gratia payments (made without legal obligation), then such amounts would not be considered to have been received as benefits under the Act and the amounts would not be included in calculating an individual's income for a taxation year.

We hope these comments will assist you. Should you wish to remit further details concerning the ex-gratia payments (for example, the authority for and full details regarding the payments) we would be pleased to provide you with additional comments.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch