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: whether retiring allowance
Position: question of fact
Reasons: 248(1) definition
2001-008212
XXXXXXXXXX Denise Dalphy, LL.B.
(613) 957-9231
June 27, 2001
Dear XXXXXXXXXX:
Re: Damages
This is in reply to your letter of January 23, 2001 where you requested our views on whether a settlement payment that you received from your former employer is subject to income taxation.
Facts
Our understanding of the facts is as follows:
1. It seems that you filed a Statement of Claim in the above-noted matter on XXXXXXXXXX, wherein you claimed, inter alia, $XXXXXXXXXX as damages for constructive or wrongful dismissal, $XXXXXXXXXX as damages for mental distress; and $XXXXXXXXXX as punitive damages.
2. On XXXXXXXXXX you signed and settled your litigation against XXXXXXXXXX. The Release that you signed on XXXXXXXXXX states that you waived your right to continue litigation in consideration of a payment to you of $XXXXXXXXXX, payable as follows:
$XXXXXXXXXX "in respect of my claim for damages for mental distress"
$XXXXXXXXXX as an RRSP contribution
$XXXXXXXXXX for costs, payable to your counsel
The Release also provides that for other consideration, you released the Defendants from all claims, including those related to "the conditions of [your] employment and the constructive termination thereof". It is not clear what additional consideration (for example, whether it was cash, letters of recommendation, etc.) may have been provided to you.
3. On XXXXXXXXXX signed an Order permitting you to amend your Statement of Claim in the matter of XXXXXXXXXX by adding the following to paragraph XXXXXXXXXX therein:
XXXXXXXXXX.
We do not have any information that explains why the Statement of Claim was amended after you signed the aforementioned Release.
Written confirmation of the tax implications inherent in a particular transaction are given by this Directorate only where the transactions are proposed and the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. The following comments are, therefore, of a general nature only, and are not binding on the Department.
Subsection 248(1) of the Income Tax Act (the "Act") defines a "retiring allowance" as follows:
""retiring allowance" means an amount ...received
(a) ..., or
(b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal,
by the taxpayer ..." [emphasis added]
Accordingly, damages received as compensation for mental distress suffered by an employee as a result of the loss of employment would be taxed as a retiring allowance. However, where it can be satisfactorily demonstrated that a portion of a settlement amount that is in respect of damages for mental distress was not related to any mental distress that may have been suffered from the loss of employment, then that portion, within limits, will not be subject to tax. This is always a question of fact. In such a case, a reasonable amount (equivalent to an amount that a court would be predisposed to award in that regard, if it had the opportunity to consider all of the circumstances of the case) of the settlement in respect of the damages for mental distress that were not related to a person's loss of employment would be considered non-taxable. This would require a comparison to similar cases that have been considered by the courts. To the extent that the settlement amount reflects court awards under comparable circumstances, the amount received would be considered as not subject to tax. Any excess would, however, be characterized as a retiring allowance for tax purposes.
In Young, a Tax Court of Canada case (86 DTC 1567), the Court considered the income tax consequences of a taxpayer who was awarded damages by Court Order in the following amounts:
$10,000.00 for wrongful dismissal
$12,500.00 for exemplary damages
$12,500.00 for mental distress
$ 5,000.00 for costs
The taxpayer Appellant did not include the damages for mental distress and the exemplary damages in computing his income. In this case, there was very little information before the Court as to the origin of the payment. The Court stated that it would have taken some direct evidence or testimony to fulfill the taxpayer's obligation to demonstrate that the amounts were not a retiring allowance and since it had neither, the Court concluded that the Minister did not act improperly in including the amounts in the taxpayer's income.
A review of the limited information concerning your situation does not permit a determination. The aforementioned Release does not indicate whether or not any of the damages for mental distress relate to your loss of employment or to something else. Also, it seems unusual that your Statement of Claim was amended after you signed the Release (albeit, with the consent of the Defendants). However, even if the Statement of Claim had been amended before you signed the Release, the amendment, which concerns mental distress that you suffered from XXXXXXXXXX is not conclusive of the matter of whether all or a portion of the $XXXXXXXXXX is a "retiring allowance", because your Statement of Claim and the Release both raise the issue of your constructive dismissal during that period. If the damages that you received for mental distress relate to your constructive dismissal, that amount would be included in your income as a retiring allowance.
As mentioned above, a review of all the facts as well as the relevant documentation would have to be done before a determination can be made as to whether the negotiated settlement constitutes a reasonable amount or an amount equivalent to what a court may award if it had the opportunity to consider all the facts. In this regard, you may wish to provide all the relevant information to the XXXXXXXXXX Taxation Services Office ("TSO"). We would be glad to provide assistance to the TSO should they request it.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.
Yours truly,
Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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