29 July 2002 Internal T.I. 2002-0141080 - settlement-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 CCRA.

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

Principal Issues: The income tax treatment of various amounts referred to in a settlement agreement between a taxpayer and a former employer.

Position: Question of fact.

Reasons:     Since a written settlement agreement is often couched in standard terms, it is necessary to review the statement of claims, relevant correspondence between the parties, etc., as well as the written settlement agreement, to ascertain the true nature of payments made under a settlement agreement.
		July 29, 2002

	Business Window	HEADQUARTERS
	Client Services	J. Gibbons, CGA
	Edmonton TSO	(613) 957-2135

	Attention:  Natalie Loyce
	                  Resource Officer
		2002-014108

Severance Pay

We are replying to your memorandum sent by facsimile on May 15, 2002, regarding the income tax treatment of amounts to be received by a taxpayer pursuant to a particular severance agreement (the "agreement"), which you have provided us. You have expressed the view that the vacation pay should be reported on a T4 as employment income, and that the remaining amounts should likely be reported as severance pay on a T4A.

Pursuant to the agreement, the employer is required to pay the taxpayer the following:

a) Severance in the amount of $XXXXXXXXXX per month for XXXXXXXXXX months commencing on XXXXXXXXXX, and ending on XXXXXXXXXX ;

b) A one-time lump sum payment of $XXXXXXXXXX;

c) A transfer of commuted value from the registered pension plan in the amount of $XXXXXXXXXX;

d) An additional severance amount of $XXXXXXXXXX;

e) A payout of unused vacation in the amount of XXXXXXXXXX hours.

It is a question of fact that can only be determined from reviewing all of the surrounding facts and circumstances whether an amount received by a taxpayer from a former employer pursuant to a written settlement agreement is a retiring allowance, employment income or something else. Since a written settlement agreement is often couched in standard terms, it is also necessary to review the statement of claims, relevant correspondence between the parties, etc., to ascertain the true nature of payments made under a settlement agreement.

Generally, amounts received in respect of a loss of 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, are considered retiring allowances and are taxed under subparagraph 56(1)(a)(ii) of the Income Tax Act (the "Act"). This includes, for example, 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. 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. Damages do not include a reimbursement of a taxpayer's legal costs. (See paragraph 9 of IT-337R3, "Retiring Allowances".)

Whether periodic payments subsequent to an individual's loss of office or employment (over a reasonable period of time) are installments of a retiring allowance or a continuation of salary can only be determined after reviewing all of the relevant facts. However, in making such a determination, we will generally deny treatment of such payments as a retiring allowance if the employer treats the payments as income from employment for the purposes of computing employment insurance premiums and benefits, computing Canada Pension Plan pension accruals, or computing eligible years of service under a registered pension plan. The employer should treat payments consistently for purposes of the statutes that we administer. (See Income Tax Technical News No. 19).

On the other hand, amounts paid to former employees that relate to unpaid salary or benefits are taxable under subsection 5(1) (alone or together with paragraph 6(3)(b)) or paragraph 6(1)(a) of the Act. Thus, for example, the payment of unpaid vacation would be taxed under these provisions. (See paragraph 7 of IT-337R3.)

In our view, based on the limited information contained in the agreement, we agree with your view that the amounts received or to be received by the taxpayer, other than the amount for unused vacation leave and the transfer of the commuted value from the registered pension plan, should be treated as retiring allowances. We also agree with your view that the vacation pay should be taxed as employment income. We did not have enough information to determine whether the transfer of the commuted value from the registered pension plan is a non-taxable transfer to another registered plan or something else. We would caution, however, that before making a final determination, you should consider gathering additional information to establish more definitively the true nature of the payments made pursuant to the agreement.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. 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 electronic library version, or they may request a severed copy 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, who will send the severed copy to you for delivery to the client.

Lena Holloway, CA
A/Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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