15 October 2001 External T.I. 2001-0100035 - DAMAGES-LOST INCOME AND RETIRING

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Differences between damage settlements
1 those qualifying as retirement allowances and

2 those damage settlements involving a claim before the Canadian Human Rights Commission where an employee/employer relationship never began?

Position:

1. Retiring Allowances in respect of a loss of income taxable

2. Damages in respect of loss of opportunity for employment involving Canadian Human Rights not taxable.

Reasons:

1. 248(1) retiring allowances

2. source cannot be linked to employment, office, business or property.

Ms. Druscilla Flemming
Fisheries and Oceans
360 Laurier Street, 4th Floor			2001-010003
Ottawa, ON K1A 0E6				C. Tremblay, CMA

October 15, 2001

Dear Ms. Flemming:

Re: Damages-Lost Income and Retiring Allowances

This is in reply to your letter of August 31, 2001 and further to a telephone conversation (Flemming/Tremblay) of September 7, 2001 in which you requested us to clarify a situation involving a damage settlement that qualifies as a retiring allowance and is included in income and a transaction involving a damage settlement that is excluded from income.

Our Comments:

Generally, damages, such as those received for lost (unearned) wages or employee benefits, are taxable under subsection 5(1) of the Income Tax Act (the "Act") or paragraph 6(1)(a) of the Act if the employee retains his or her employment or is reinstated, or under paragraph 56(1)(a) as a retiring allowance if the employee loses his or her office or employment. The term "retiring allowance" is defined in subsection 248(1) of the Act, in part, as "an amount...received...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." The Supreme Court of Canada found in Savage, 83 DTC 5409 and Nowegijick, 83 DTC 5041 that the words "in respect of" are of the widest possible scope. They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters. Accordingly, it is our view that, for example, amounts received as compensation for damages to health, extended pain, and mental distress suffered by an individual as a result of the loss of his or her employment are taxed as a retiring allowance. 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.

Where damages are awarded in a situation where an employee/employer relation never commenced, the Supreme Court of Canada decision in Schwartz V. The Queen, 96 DTC 6103, is relevant. In that decision, the taxpayer was offered an employment position that was to commence at a later date with a specified salary and stock options. Before the taxpayer commenced to be employed, the offer was withdrawn and, after negotiations, the employer agreed to pay the taxpayer $400,000 representing $360,000 in damages and $40,000 for costs. The decision held that the damages received by the appellant could not be considered a "retiring allowance" within the meaning of subsection 248(1) of the Act and therefore were not taxable under subparagraph 56(1)(a)(ii) of the Act because they were not received "in respect of a loss of . . . employment". The reasons for the decision went on to state that when one considers the ordinary meaning to be given to the words found in the definition of "employment" in subsection 248(1) of the Act, a distinction must be made between the start of the contractual relationship agreed upon by the employer and the employee and the moment, according to the terms of the contract, at which the employee is bound to start providing services to the employer. The statutory requirement that one must be "in the service" of another person to be characterized as an "employee" excludes any notion of prospective or intended employment. An employee is thus only "in the service" of his employer from the moment he becomes under obligation to provide services under the terms of the contract. It follows that "loss of employment" cannot occur before an employee becomes under obligation to provide services to his future employer because he cannot, before that moment, be "in the service" of that employer.

We trust our comments are of assistance.

Yours truly,

Steve Tevlin
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch