27 February 2002 External T.I. 2002-0121305 - DAMAGES-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: Are various amounts received by T/P as a result of a settlement for employment termination taxable?

Position: question of fact

Reasons: some amounts may be considered retiring allowance and therefore taxable

XXXXXXXXXX 				2002-012130
					Shaun Harkin, CMA
February 27, 2002

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Minutes of Settlement

This is in reply to your letter of November 13, 2001 wherein you requested our views on whether a settlement payment received by a taxpayer from a former employer is subject to income taxation.

Facts

A taxpayer has entered into Minutes of Settlement relating to a claim against the XXXXXXXXXX. The taxpayer was terminated from employment with the XXXXXXXXXX. The settlement provides for a payment to the taxpayer of $XXXXXXXXXX allocated as follows:

1. $XXXXXXXXXX on account of emotional distress;

2. $XXXXXXXXXX on account of retraining allowance;

3. $XXXXXXXXXX on account of prejudgement interest; and

4. $XXXXXXXXXX on account of legal fees.

Written confirmation of the consequences inherent in particular transactions are 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 70-6R4. If, however, the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.

Our Comments

1. The term "retiring allowance" is defined in subsection 248(1) of the Income Tax Act (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, mental distress and emotional distress suffered by an individual as a result of the loss of his or her employment are taxed as a retiring allowance. We would also note that in John James Young (TCC), 86 DTC 1567, damages for mental distress and exemplary damages were found to be "in respect of the loss of an office or employment" and therefore found to qualify as a retiring allowance.

2. As stated in paragraph 9 of Interpretation Bulletin IT-337R3, Retiring Allowances, an amount received as damages for the loss of employment is taxable as a retiring allowance. Thus, a retiring allowance includes any amount paid to the employee, to the former employee, or to a third party on behalf of the employee or former employee, if the amount is paid in respect of a loss of office or employment. This statement applies to punitive damages, amounts received for hurt feelings surrounding the loss of employment, and amounts received for specific damages, including the payment of retraining costs incurred by the employee or former employee as a result of the loss of employment.

3. The term, prejudgment interest, refers to interest computed for the period prior to the court order (or settlement) whereas post-judgement interest refers to interest computed from the date of the judgement or settlement. It is our general position that prejudgment or pre-settlement interest paid on an award or settlement for wrongful dismissal may be excluded from income.

4. The reimbursement of legal costs does not form part of a retiring allowance, but is included in income under paragraph 56(1)(l.1) of the Act. When an award or reimbursement of legal fees is brought into income, a deduction of the legal fees paid is available to the extent provided by paragraph 60(o.1) of the Act.

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 disclaimer in all instances in which we provide an opinion.

We trust the above comments are of assistance.

Yours truly,

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