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: Is an amount received involving a claim before the Canadian Human Rights Commission in a situation where an employee/employer relationship never began, taxable?
Position: No
Reasons: section 3 - source cannot be linked to employment, office, business or property.
XXXXXXXXXX 2001-008393
C. Tremblay, CMA
July 3, 2001
Dear XXXXXXXXXX,
This is in reply to your letter of May 3, 2001, wherein you requested our views on the taxability of payments contemplated by the Minutes of Settlement between XXXXXXXXXX and Her Majesty the Queen in right of Canada as represented by the XXXXXXXXXX and mediated before the Canadian Human Rights Commission.
The facts are as follows:
XXXXXXXXXX.
As explained in Information Circular 70-6R4, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance income tax ruling request. However, we can provide you with the following general comments.
The courts have looked at the definition of "retiring allowance" and have stated that it does not refer to an "intended" or "prospective employment" and that an "employee" is one who "occupies a position in the service of another". In our opinion the Supreme Court decision in Schwartz v The Queen (96 DTC 6103) is relevant. The Supreme Court overturned the decision of the Federal Court of Appeal for the most part because there was no evidence tending to establish specifically what portion of the amount was allocated to employment income and which amount was allocated to general damages. Further, in our view, based on the principles established in Overin v The Queen (98 DTC 1299), the appropriate test is to ask "but for the loss of employment would the amount have been received?"
In your situation, the complaint was based on an alleged discrimination in employment on the basis of disability under section 10 of the Canadian Human Rights Act. However, there is no indication that XXXXXXXXXX would have ever employed XXXXXXXXXX. The minutes of settlement simply refer to compensation for lost income.
Based on the information submitted, it is our opinion that the payment as compensation for lost income would not appear to be a retiring allowance or employment income because there is no present or future obligation from XXXXXXXXXX to provide any services to XXXXXXXXXX nor were any services ever provided. Similarly, the payment for training costs incurred would generally be viewed as a reimbursement of costs and would not be taxable.
In our view, it would not be unreasonable to conclude, from the information on hand, that the amount received by XXXXXXXXXX from his potential employer consisted of damages relating to a human rights violation.
Our position with respect to human rights violations is set out in paragraph 9 of Interpretation Bulletin IT-337R3 as follows:
"...An amount paid on account of or in lieu of general damages, that is, damages for loss of self-respect, humiliation, mental anguish, hurt feelings, etc., or pursuant to an order or judgment of a competent tribunal may be a retiring allowance if the payment arises from a loss of office or employment of a taxpayer. However, if a human rights tribunal awards a taxpayer an amount for general damages, the amount is normally not required to be included in income. 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."
In summary, where the payment is not considered income from an office or employment nor a retiring allowance, there would be no requirement for XXXXXXXXXX to withhold any payroll deductions.
The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R4, this is not an advance income tax ruling and is therefore not binding on the Canada Customs and Revenue Agency.
We trust the above comments are of assistance.
Yours truly,
Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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