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: Taxation of a proposed settlement of a wrongful dismissal suit. Follow-up to 2004-009188.
Position: Taxable retiring allowance except amounts paid as a reimbursement of legal expenses, which is taxable under paragraph 56(1)(l.1) to the extent that the underlying legal expenses are deductible under paragraph 60(o.1).
Reasons: Payment is in respect of damages for loss of employment. None of the exceptions in paragraph 12 of IT-337R4 apply.
XXXXXXXXXX T. Young, CA
2004-009894
October 27, 2004
Dear XXXXXXXXXX:
Re: Wrongful Dismissal Claim
We are writing in reply to your letter of October 13, 2004, requesting that we reconsider our comments in our September 24, 2004, letter to you (our reference 2004-009188) regarding a proposed settlement reached between you and your former employer. In our September 24 letter, we concluded that the "entire $XXXXXXXXXX, except for payments on account of legal expenses, is a taxable retiring allowance." This conclusion was based, in part, on the fact that you were unable to provide any documentation supporting the breakdown of the settlement.
Included with your October 13, 2004, letter was correspondence from your legal counsel to counsel for your former employer dated September 11, 2003, indicating the following breakdown of the settlement:
1. Damages for capital losses and other expenses $XXXXXXXXXX
2. Damages for loss of income and other employment-
related benefits XXXXXXXXXX
3. Solicitor-client costs, disbursements and GST XXXXXXXXXX
Total $XXXXXXXXXX
The first item included losses on the sale of your homes in XXXXXXXXXX and XXXXXXXXXX, as well as various relocation costs from XXXXXXXXXX to XXXXXXXXXX and XXXXXXXXXX to XXXXXXXXXX. You also included a letter from your former employer's counsel dated December 9, 2003, acknowledging the September 11 letter. Based on this correspondence, you have asked us to reconsider our conclusions reached in our September 24, 2004, correspondence.
As we stated in our previous letter, subparagraph 56(1)(a)(ii) of the Income Tax Act (the "Act") requires a taxpayer 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 discusses what is meant by a retiring allowance and its treatment for income tax purposes. 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."
As we stated in our various telephone conversations (Young/XXXXXXXXXX), in our view, the definition of retiring allowance includes items 1 and 2. Consequently, we are still of the view that the $XXXXXXXXXX settlement is taxable - the reimbursed legal fees under subparagraph 56(1)(l.1) of the Act and the remainder as a retiring allowance under subparagraph 56(1)(a)(ii) of the Act.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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