21 June 2001 Internal T.I. 2001-0082717 - RETIRING ALLOWANCE

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 damages received for another's tortious action forms part of a retiring allowance

Position: depends on evidence

Reasons: was the purpose of the payment to compensate the taxpayer for a loss of employment

		June 22, 2001

OTTAWA TAX SERVICES OFFICE	HEADQUARTERS
Appeals Division	Partnerships Section
		Denise Dalphy,LL.B.
	Attention: Denise Dittberner
	                 Business Objections
		2001-008271

XXXXXXXXXX
Taxation of Damages Award

This is in reply to your memorandum of May 2, 2001 where you requested our views on whether amounts received by the taxpayer as a result of court decisions that XXXXXXXXXX induced the taxpayer's former employer to breach its employment contract with the taxpayer fall within the ambit of "retiring allowance", which is defined in subsection 248(1) of the Income Tax Act (the "Act").

Facts

Our understanding of the facts is as follows:

1. In XXXXXXXXXX, the taxpayer was dismissed by XXXXXXXXXX employer.

2. XXXXXXXXXX received a retiring allowance of $XXXXXXXXXX from XXXXXXXXXX. This retiring allowance was declared in XXXXXXXXXX and is not in dispute.

3. In XXXXXXXXXX, the taxpayer sued XXXXXXXXXX for 'inducing breach of contract' on basis that XXXXXXXXXX had influenced XXXXXXXXXX to dismiss XXXXXXXXXX in XXXXXXXXXX.

4. In XXXXXXXXXX, the court awarded the taxpayer the following:

Award for libel $ XXXXXXXXXX
Award for inducing breach of contract $XXXXXXXXXX
Interest (to be determined)
Total $XXXXXXXXXX plus interest

5. The taxpayer's XXXXXXXXXX award was appealed by XXXXXXXXXX.

6. In XXXXXXXXXX, the XXXXXXXXXX decision was confirmed by higher court.

7. The taxpayer received $XXXXXXXXXX in awards and interest and $XXXXXXXXXX for costs:

Award for libel $ XXXXXXXXXX
Award for inducing breach of contract $XXXXXXXXXX
Interest $XXXXXXXXXX
Pre-judgment $XXXXXXXXXX
Post-judgment $XXXXXXXXXX
Daily interest $ XXXXXXXXXX
Legal Fees
Reimbursed $XXXXXXXXXX
Not reimbursed $ XXXXXXXXXX

Caselaw

The following cases are particularly relevant in considering this situation, since they discuss the tests to apply in determining whether an amount is a "retiring allowance".

Young, 86 DTC 1567 (TCC)

Although this case does not set out tests to follow, it is nonetheless a case that cannot be ignored since it considers damages for mental distress and exemplary damages in circumstances where a taxpayer was wrongfully dismissed.

The taxpayer's counsel argued that damages awarded by a court are compensation for a personal injury and are not taxable. His counsel asserted that the fact that the claim for damages was joined in an action for breach of an employment contract, i.e. damages for wrongful dismissal, should not change the essential character of the award damages, which are for a personal injury. Counsel also argued that since the exemplary damages are damages in tort and not in contract, and are imposed by a court in order to deter the conduct of the particular defendant and in order to deter that conduct generally, they are not payments in respect of a loss of employment.

The Minister argued that the damages for mental distress and punitive damages in this case were clearly in connection with the loss of the office or employment of the taxpayer since they were awarded against the former employer as a result of the method and manner of the loss of employment or the firing, and that they bear a direct relation to the loss. The Minister conceded that, unlike the damages for breach of contract, which were damages in contract, the damages paid as a result of the method of the loss of employment were damages in tort. However, the Minister argued that since the tort damages arose from the loss of employment, they were related to that loss and therefore a "retiring allowance".

In this case, the information before the Court was scarce. There was nothing specific in the "Agreed Statement of Fact" with respect to the origin of the disputed amounts, and the Court had no direct evidence or testimony to consider. In addition, the taxpayer's counsel had neither acknowledged nor denied that there was any direct connection, chronological or otherwise, between the "dismissal", and the "exemplary damages" or the amount for "mental distress".

The Court acknowledged that the Minister's assumption that the damage awards at issue flowed from the dismissal was reasonable, and the Court, since it had no evidence to the contrary, accepted that the taxpayer had not displaced his onus to rebut the Minister's assumptions. Accordingly, the case is based on a lack of evidence and is therefore of limited utility.

Bedard, 91 DTC 573 (TCC)

Upon settling a wrongful dismissal lawsuit, the taxpayer received 6 months salary and $32,000. The latter was described as "compensation for damage suffered".

The Court stated that the question to be asked was: "was the compensation granted the appellant directly related to the loss of his employment?" and the issue to be decided was "what portion of the amount of $32,000 is related to the loss of employment suffered by the appellant." [emphasis added]The Court held that, on the evidence*, $16,000 of the $32,000 had been intended to constitute damages for defamation, which is not part of a "retiring allowance" under the Act. The Court stated:

"The Court is of the opinion that the lawmakers obviously did not, in adopting the definition of retiring allowance", intend it to include damages for defamation that might be suffered by the occasional victim of a dismissal. The cause linking the loss of employment to the granting of damages must be efficient and not purely occasional. In short, while an amount granted to an employee after his dismissal may include damages for defamation, it is clear to the Court that any such part of the compensation granted belongs to an entirely different order of compensation that is manifestly not covered by the definition of "retiring allowance"."

The Court considered the decision of the Court in Young. The Court stated:

"Thus, in the Court's opinion, Taylor, J.T.C.C. did not in the Young case (4.02(4)) rule out the possibility that amounts granted as compensation for the "mental distress" suffered by the appellant might not be regarded as retiring allowance. Taylor, J.T.C.C. merely stated that the evidence adduced by counsel for the appellant was insufficient to show how the amount received had been granted as compensation for a type of damage other than that resulting from the loss of his employment." The following passage from the judgment illustrates this position clearly:

Mr. Horwitz in his argument had neither acknowledged nor denied that there was any direct connection, chronological or otherwise, between the "dismissal", and the "exemplary damages" or the amount for "mental distress". The Court recognized that it might well be a reasonable assumption by the Minister.

Overin, 98 DTC 1299 (TCC)

In Overin, the Province of British Columbia, paid the taxpayer a lump sum as a result of a politically motivated agreement between the province and all of C Corp.'s terminated employees. In return, the taxpayer assigned his right to sue C Corp. to the province. The Minister characterized the lump sum in issue as a "retiring allowance".

The Court applied the following two tests:

1. but for the loss of employment would the amount have been received?

2. was the purpose of a payment to compensate a loss of employment?

The Court held that if the answer to the first question is "no", and the answer to the second question is "yes", the amount is a "retiring allowance. The Court held:

"In the case at bar, the appellant lost his employment. The transaction between the appellant and the Province and his loss of employment with Cassiar cannot be put in two separate watertight compartments. But for the loss of employment the appellant would not have received any money from the Province of British Columbia. That Cassiar was in receivership and the Province intervened to assure a payment was made does not, in my opinion, alter this conclusion. To the extent that the purpose and effect of the Province's intervention was to counterbalance the effect of the appellant's loss of employment by compensating the appellant, the payment may be considered to have been received in respect of a loss of employment because of its compensatory nature. The payment, therefore, can reasonably be considered to be a "retiring allowance" within the meaning of subsection 248(1)."

Our Comments

XXXXXXXXXX

"Inducement to breach a contract", which is sometimes called "intentional interference with contractual relations", like defamation (libel and slander), falls within the legal classification of "torts", which are legal wrongs. Torts fall in a separate legal area and are not part of Contract Law (as is wrongful dismissal).

Per Osborn's Concise Law Dictionary, sixth edition, a "tort" is

"An act which causes harm to a determinate person, whether intentionally or not, not being the breach of a duty arising out of a personal relation or contract, and which is contrary to law, or an omission of a specific legal duty, or a violation of an absolute right." [emphasis added]

In the absence of any evidence offered by a taxpayer that an amount received by him as a result of the tortious actions of another person, the mere facts that the payment is for damages for a successful action in tort (and not in contract), or that the payment is made by a person who is/was not the taxpayer's employer are not, in and of themselves, sufficient to rebut reasonable assumptions made by the Minister that a payment that would not have been made "but for" a taxpayer's loss of employment (the first test in Overin) and that such a payment is directly related to the loss of employment.

However, while the fact that a payment is pursuant to tort law, not contract law, is not determinative of the "retiring allowance" issue, it is quite significant. This can be seen in Bedard, where the Court concluded that the tort of defamation is an "entirely different order of compensation that is manifestly not covered by the definition of "retiring allowance." Further, XXXXXXXXXX, damages in tort are "at large". This means that the Court may take into account the conduct of the tortfeasor (i.e., XXXXXXXXXX in this case) in awarding damages and the Court may require a plaintiff to be compensated for any loss of commercial reputation. Since a plaintiff is not permitted to recover double damages (in suing both his employer for the breach and the tortfeasor for inducing the employer to breach its contract with the plaintiff), it is quite likely that damages that the taxpayer received in this case, were not paid to compensate him for the loss of his job, but to "punish" or "prevent" persons from inducing others to break contracts, particularly since our economy is so dependant upon contracts for the transfers of goods and services.

If there is credible evidence that the purpose of a payment was not to compensate a loss of employment (the second test in Overin), a payment is not a "retiring allowance". In the situation that you are presently considering, since our understanding is that the Judgment offers little in the way of assistance in making this determination, you may wish (if the taxpayer permits) to consult with the barrister who acted for the taxpayer in this litigation or other parties to the litigation, or to ask the taxpayer for access to his legal file (for example, pleadings, the factum in the appellate court, etc.) on the matter.

Finally, the classification for income tax purposes of the amount received by the taxpayer regarding XXXXXXXXXX tortious actions, will have a direct impact on the income tax treatment of interest received by the taxpayer, because the CCRA's administrative position, wherein it has agreed not to tax certain interest payments, is, XXXXXXXXXX, very limited.

We hope this opinion will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

* since the wording of the settlement was not conclusive, the Court considered the testimony of the taxpayer and the taxpayer's former employer

- 5 -