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: Income tax treatment of amounts received out of settlement with employer in respect of lost wages and general damages.
Position: Special damages, such as those received for lost (unearned) wages or employee benefits, are taxable as employment income under subsection 5(1) or paragraph 6(1)(a) if the employee retains his or her employment or is reinstated, or as a retiring allowance under subparagraph 56(1)(a)(ii) if the employee loses his or her office or employment. When a loss of employment involves a human rights violation and is settled out of court, a reasonable amount in respect of general damages can be excluded from income.
Reasons: Based on position in paragraph 9 of IT-337R3.
XXXXXXXXXX J. Gibbons
April 6, 2000
As requested by your representative, XXXXXXXXXX, in a letter to us dated January 12, 2000, we are writing to provide our comments concerning the income tax treatment of payments arising from a settlement with your employer, XXXXXXXXXX. Included with XXXXXXXXXX letter was a copy of an investigation report (the "Investigation Report") by the Alberta Human Rights Citizenship Commission (the "Human Rights Commission"), as well as two letters that they had sent to you.
You should note that it is your local tax services office that has the responsibility to determine the proper income tax treatment of any amounts received or to be received from your settlement. Accordingly, you may wish to submit all relevant facts and documentation to the appropriate Tax Services Office for their comments. However, we have provided some general comments which may be of assistance to you. Further, we have provided the Calgary Tax Services Office with a copy of our letter for their benefit.
Having regard to the investigation report by the Human Rights Commission, wherein they recommended that you receive compensation for lost wages from your employer and general damages for the injury to your dignity and self-respect, it is our opinion that your settlement may also be considered to relate to these two items. The income tax treatment of these different items is explained in IT-337R3, "Retiring Allowances." As indicated in paragraph 9 of this bulletin, special damages, such as those received for lost (unearned) wages or employee benefits, are taxable as employment income under subsection 5(1) or paragraph 6(1)(a) if the employee retains his or her employment or is reinstated, or as a retiring allowance under subparagraph 56(1)(a)(ii) if the employee loses his or her office or employment. This paragraph also indicates that, when a loss of employment involves a human rights violation and is settled out of court, a reasonable amount in respect of general damages can be excluded from income. The determination of what is reasonable is influenced by the maximum amount that can be awarded under the applicable human rights legislation and the evidence presented in the case.
Based on the foregoing, it will be necessary to allocate the gross amount of your settlement between non-taxable amounts for general damages and employment income which is taxable. In the circumstances, it is our view that a reasonable allocation may be made by using the same proportions as provided in the Investigation Report. In general terms, this report suggested that you receive $XXXXXXXXXX for lost wages (less amounts required by law and less any income) and $XXXXXXXXXX for general damages. Assuming that the parenthetical amounts are nil, this would suggest an allocation of approximately 5% of the settlement for non-taxable general damages with the remaining 95% for taxable employment income.
As a final remark, we note that the 1999 Federal Budget contained a proposal to provide relief in some circumstances for taxpayers who receive certain lump sum payments after 1994. For individuals, income from most sources is taxable in the year in which it is received. As a result, individuals are generally taxable on retroactive lump-sum lump payments in the year they are received, even though a significant portion may relate to prior years. Due to the progressive rate structure of the income tax system, the tax payable on those lump-sum payments may, therefore, be significantly higher than it would have been if payments had been received and taxed on an ongoing basis from the date of eligibility. Pursuant to the 1999 Federal Budget Proposals, income from an office or employment received as a lump-sum payment in settlement of a lawsuit will qualify for this new relief. See page 12 of the 1999 General Income Tax and Benefit Guide for additional details.
We trust that these comments will be of assistance to you.
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
c.c. Calgary Tax Services Office
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