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.

Principal Issues: Whether an amount received as a lump sum settlement is included in the recipient's income as a retiring allowance.

Position: A portion of the amount is considered to be a retiring allowance.

Reasons: Pursuant to IT-337R4, amounts received in respect of a human rights violation are not considered to be a retiring allowance.

            June 15, 2004

      XXXXXXXXXX  HEADQUARTERS
      Resource Officer  A. Seidel
      Client Services Division      (613) 957-2058
      XXXXXXXXXX  Tax Services Office

      Attention: XXXXXXXXXX
            2004-006718

Settlement Payment

We are writing in response to your memorandum of March 11, 2004, in which you requested our views with respect to the appropriate taxation of a lump sum settlement received by an employee from his former employer.

Background

XXXXXXXXXX (the "Employee") employment was terminated by XXXXXXXXXX (the "Employer") on XXXXXXXXXX. The Employee's union filed a grievance on his behalf and argued that he was unjustly terminated and that he had been discriminated against because of his disability. The grievance was scheduled to proceed to arbitration in XXXXXXXXXX. On XXXXXXXXXX, the Employee and the Employer agreed to a "Release and Agreement" (the "Agreement") pursuant to which the grievance was settled prior to proceeding to arbitration. The Agreement was agreed to by the Employee "for the purpose of making full and final compromise, adjustment and settlement of any and all claims".

The Agreement provided for a $XXXXXXXXXX payment to the Employee "as general damages for giving up the right to seek reinstatement, for the alleged human rights issues raised relating to an alleged disability and for other damages claimed relating to this case". The Employee "remised, released and discharged" the Employer from all claims for damages under the Canadian Human Rights Act, XXXXXXXXXX, the Citizenship and Multiculturalism Act and the Employment Standards Code. The parties agreed that $XXXXXXXXXX of the settlement amount is in respect of liquidated damages relating to the claim for discrimination alleged by the Employee, and that the remaining $XXXXXXXXXX relates to "giving up the right to seek reinstatement" and "full compensation and consideration for loss of employment benefits".

Issue

Is the lump sum settlement received by the Employee in XXXXXXXXXX included in the Employee's income as a "retiring allowance", within the meaning thereof in subsection 248(1) of the Income Tax Act (the "Act"), or is the amount excluded from income as a payment of damages.

Our Comments

Pursuant to subparagraph 56(1)(a)(ii) of the Act, a taxpayer is required to include, in computing income for a taxation year, the amount of a retiring allowance received by the taxpayer in the year.

The definition of "retiring allowance" in subsection 248(1) of the Act includes 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".

Interpretation Bulletin IT-337R4, Retiring Allowances ("IT-337R4") discusses what is meant by a retiring allowance and discusses the taxation of amounts that are considered to be a retiring allowance. Paragraph 9 of IT-337R4 states that "generally, compensation received by an individual from the individual's employer or former employer on account of damages may be employment income, a retiring allowance, non-taxable damages, or a combination thereof. Paragraph 11 of IT-337R4 states that "where an individual receives compensation on account of damages as a result of a loss of employment, the amount received will be taxed as a retiring allowance. This applies to both special damages, as well as general damages received for loss of self-respect, humiliation, mental anguish, hurt feelings, etc". Finally, paragraph 12 of IT-337R4 states that "general damages relating to human rights violations can be considered unrelated to a loss of employment, despite the fact that the loss of employment is often a direct result of a human rights violations complaint", and that "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. Any excess will be taxed as a retiring allowance."

In this particular case, the Agreement provides that the lump sum settlement is comprised of two amounts, $XXXXXXXXXX as a payment of liquidated damages relating to the alleged discrimination due to disability and the remaining $XXXXXXXXXX as a payment for giving up the right to seek reinstatement and compensation for loss of employment benefits. It is our view that the $XXXXXXXXXX amount received as liquidated damages is an amount described in paragraph 12 of IT-337R4 and would, therefore, not be required to be included in computing the Employee's income in XXXXXXXXXX. However, it is also our view that the $XXXXXXXXXX amount received for giving up the right to reinstatement and as compensation for loss of employment benefits is an amount described in paragraph 11 of IT-337R4 and would, therefore, be required to be included in the Employee's XXXXXXXXXX income as a retiring allowance, pursuant to subparagraph 56(1)(a)(ii) of the Act.

If we can be of any further assistance in resolving this issue, please do not hesitate to contact us.

Randy Hewlett, B. Comm.

Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch