15 January 2007 External T.I. 2006-0196531E5 - Breach of Contract Settlement

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 the breach of contract settlement received is a deemed dividend for tax purposes based on the terms and conditions of the contract of employment.

Position:

No.

Reasons:

In our opinion, the breach of contract settlement amount is a retiring allowance for purposes of the Act as defined in subsection 248(1) and included in the income of the recipient under subparagraph 56(1)(a)(ii).

2006-019653
XXXXXXXXXX D Tiu
(613) 957-8961
January 15, 2007

Dear XXXXXXXXXX:

Re: Breach Of Contract Settlement

We are writing in response to your June 29th, 2006 inquiry on the above subject and further to our subsequent telephone discussions (XXXXXXXXXX/Tiu). You inquired whether the breach of contract settlement of $XXXXXXXXXX received by your client is a deemed dividend for tax purposes based on the terms and conditions of the contract of employment. You provided the following information:

? The employment contract provided that on the XXXXXXXXXX anniversary of his employment, your client would receive XXXXXXXXXX% of the common shares of the employer-corporation at a cost of $XXXXXXXXXX. It also provided that he may thereafter tender such shares for redemption for a fixed price of $XXXXXXXXXX should he quit the company, his position be terminated or in the case of his death.

? In and around the XXXXXXXXXX anniversary of his employment, your client's employment was terminated and he sued his employer.

? On XXXXXXXXXX, a court settlement was reached providing for a cash payment to your client of $XXXXXXXXXX allocated as follows:

? $XXXXXXXXXX for breach of contract,
? XXXXXXXXXX in lieu of notice, and
? XXXXXXXXXX for cost.

The particular situation in your letter relates to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Since your situation involves a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to provide the following general comments.

In our opinion, the breach of contract settlement amount is a retiring allowance for purposes of the Act as defined in subsection 248(1) and included in the income of the recipient under subparagraph 56(1)(a)(ii). Paragraph 248(1)(b) defines retiring allowance, 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."

It is commonly accepted by the courts that an amount paid as damages for the breach of an employment contract is considered to be a retiring allowance.

As requested, you could obtain information on the appeal process at the site noted below:

http://www.cra-arc.gc.ca/agency/programs_services/disagree/income_tax-e.html

An electronic copy of the Interpretation Bulletin IT-365R2, Damages, settlement, and similar receipts, may be obtained at the following site:

http://www.cra-arc.gc.ca/E/pub/tp/it365r2/README.html

These comments represent our opinions of the law as it applies generally, and as indicated in paragraph 21 of Information Circular 70-6R5, are not binding on the Department. Nevertheless, we hope that our comments will be of assistance to you.

Yours truly,

Randy Hewlett
Section Manager
For Division Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch