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 consequences of receipts for non-performance of business contracts as well as damages for slander.
Position TAKEN:
Generally, if the compensation is received for the failure to receive a sum of money that would have been an income item if it had been received, the compensation will likely be an income receipt. Damage awards for slander are generally non-taxable.
Reasons FOR POSITION TAKEN:
See paragraph 8 of IT-365R2 which for the most part is based on the surrogatum principle.
XXXXXXXXXX 2000-005292
J. Wilson
November 14, 2000
Dear Sirs:
Re: Damages
This is in reply to your letter of October 17, 2000, wherein you requested our views on the tax consequences of a damage settlement. You have indicated that your client is a self-employed consultant who had entered into a business contract with another party and the other party failed to pay him his fee as well as slandered him. Your client sued the other party for the amount owing to him as well as other damages. The two parties have reached an out of court agreement in which your client will receive his unpaid fees as well as an additional amount as damages for slander.
A determination of the tax consequences with respect to any damage settlement is a question of fact which requires a review of all relevant facts and documentation of each particular case, including the statement of claims, relevant correspondence between the parties, the settlement agreement or court order and, where relevant, the business contract. Furthermore, 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. Accordingly, the following comments are only of a general nature.
An amount received by a taxpayer in lieu of the performance of the terms of a business contract by the other party may, depending on the facts, be either an income or capital receipt. While it is a question of fact as to whether a receipt is an income or capital amount, if the compensation is received for the failure to receive a sum of money that would have been an income item if it had been received, the compensation will likely be an income receipt. We refer you paragraph 8 of Interpretation Bulletin IT-365R2, Damages, Settlement, and Similar Receipts.
As indicated in paragraph 2 of IT-365R2, amounts received by a taxpayer that qualify as special or general damages for personal injury or death will generally be non-taxable. An award of damages for "libel" (i.e. defamation of character, slander, etc.) generally would be considered for personal injury and would not be taxable. However, a review of all the facts would be necessary before a definitive determination of the tax consequences could be made.
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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