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 general damages paid by an employer to an employee for an alleged human rights violation are taxable
Position: not if the amount is reasonable in the circumstances
Reasons: paragraph 12 of IT-337R4
2004-007973
XXXXXXXXXX T. Harris
(613) 957-2114
August 25, 2004
Dear XXXXXXXXXX:
Re: Taxation of Damages Received
This is in response to your email message of June 2, 2004 wherein you requested our interpretation as to whether general damages paid to an employee in the circumstances described below would be taxable to the employee.
The employee in question filed a human rights complaint regarding accommodation of disability. As a result of an informal mediation process, which resulted in signed minutes of settlement by both parties, a payment was made to the employee for general damages. The complaint, therefore, never proceeded to investigation. The employee had been absent from work due to health leave; but has now returned to work on a part-time basis.
As stated in paragraph 9 of Interpretation Bulletin IT-337R4, Retiring Allowances
("IT-337R4") "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." Justice Mogan of the Tax Court of Canada made the following comments on this issue in the case of Catherine Dumas v. Her Majesty the Queen, 2000 DTC 2603 (TCC):
"In income tax law, there is nothing magic about an amount recovered by a plaintiff in civil litigation whether it be the result of a favourable judgment or a negotiated settlement. The amount recovered is compensatory in nature. That alone will not determine its character for tax purposes as being income or capital or something else. The real question is to determine why the compensatory amount was paid. The answer is often found in the pleadings of the plaintiff and defendant in the civil litigation."
As indicated in the above citations, a resolution of this issue requires a review of all the relevant facts, including the minutes of settlement, to determine why the amount was paid.
With respect to damages received for alleged human rights violations, 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."
Although these comments relate to a situation involving a loss of employment, it is our view that where a complaint involving a human rights violation by an employer is settled out of court, a reasonable amount in respect of general damages would not be included in the employee's income from employment. Any amount in excess of such reasonable amount would, however, be included in the employee's income from employment under either of subsections 5(1) or 6(3) of the Income Tax Act.
We trust that our comments will be of assistance.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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