21 March 2000 External T.I. 1999-0015845 - CRIME COMP. & JUDGMENT INTEREST

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:

The tax treatment of income on an award for the loss of a parent, payable under the Victims of Crime Act, Alberta (the "VCA").

The tax treatment of pre and post-judgement interest to be received, and legal fees paid, by non-residents of Canada (residents of Hong Kong).

Position TAKEN:

Based on the information provided, we would agree that awards paid under paragraph 12(1)(b) of the VAC would fall within the ambit of paragraph 81(1)(g.1) of the Income Tax Act, such that the related income would qualify for the exemption provided in that provision, to the extent that the other requirements of that provision are met.

General comments provided on the tax treatment of judgement interest and legal fees.

Reasons FOR POSITION TAKEN:

The Victim's Financial Benefits and Administration Section, which administers the VAC, confirms that the intent of benefits paid under paragraph 12(1)(b) of the VAC, to family members of deceased victims, are intended to recognize the emotional injuries sustained by the family members.

The enquiry on interest and legal fees relates to identified taxpayers and we do not have their written authorization to discuss their tax affairs with the enquirer.

		1999-001584
XXXXXXXXXX 	2000-001388
M. Azzi
Attention:  XXXXXXXXXX  

March 21, 2000

Dear Madam:

Re: Crime Compensation Awards and Judgment Interest

This is reply to your letter of December 15, 1999, which was further to our letter of August 5, 1999 (our file 5-991734/5-991735), regarding the tax treatment of income on an award for the loss of a parent, payable under the Victims of Crime Act, Alberta (the "VCA"). We are also replying to your letter (undated) regarding the tax treatment of pre and post-judgment interest to be received, and legal fees paid, by non-residents of Canada (residents of Hong Kong).

Our Comments

As indicated in our previous letter, under paragraph 81(1)(g.1) of the Income Tax Act (the "Act"), an individual can exclude from income amounts derived from certain sources for taxation years during any part of which the individual was under 21 years of age. However, to qualify for the exemption, the income must, inter alia, during the particular taxation years be derived from property received by or on behalf of an individual who is under 21 years of age as an award of, or pursuant to an action for, damages in respect of the individual's physical or mental injury. Accordingly, where an award is paid to an individual under the age of 21 as compensation for his or her own personal injuries arising as a consequence of the emotional trauma suffered due to the loss of a parent, then the provisions of paragraph 81(1)(g.1) of the Act will apply.

In your December 15, 1999 letter, you indicate that XXXXXXXXXX the intent of benefits paid under paragraph 12(1)(b) of the VAC, to family members of deceased victims, are intended to recognize the emotional injuries sustained by the family members. Based on this information, we would agree that such awards would fall within the ambit of paragraph 81(1)(g.1) of the Act, such that the related income would qualify for the exemption provided in that provision, to the extent that the other requirements of that provision are met.

As regards your enquiry with respect to the identified non-resident individuals, please note that the confidentiality provisions of the Act prohibit us from discussing the tax affairs of a particular taxpayer without the taxpayer's written authorization. In addition, in such instances, written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office. However, we can provide the following general information which may be of assistance.

As a general rule, interest is taxable to residents of Canada pursuant to paragraph 12(1)(c) of the Act, and non-residents are subject to tax on interest from a Canadian source under paragraph 212(1)(b) of the Act. However, the position of the Canada Customs and Revenue Agency is that pre-judgement interest in respect of an award for damages for personal injury or death is not subject to tax. It is also our view, however, that this position would generally not apply to interest on an amount paid to a beneficiary under a life insurance policy, as such an amount is not an award for damages, but is rather being paid in fulfilment of a contractual obligation.

As indicated in paragraph 1 of IT-99R5, Legal and Accounting Fees, except where there is a specific provision of the Act dealing with legal fees, such as paragraphs 8(1)(b) or 60(o.1) of the Act, legal fees are deductible only to the extent that they are incurred for the purpose of gaining or producing income from a business or property, and are not outlays of a capital nature. Accordingly, legal fees incurred by an individual in a dispute regarding his or her right to an amount as a beneficiary under a life insurance policy would generally not be deductible, notwithstanding that the amount may be augmented by interest.

We trust that these comments will be of assistance.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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