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: Can a deduction for a damage award be taken in the taxation year of the damage award irrespective of when the damage occurred or when the payment is actually made?
Position: Question of fact. A liability will be deductible when it is ascertained and becomes an absolute and unconditional obligation.
Reasons: Jurisprudence
XXXXXXXXXX 2007-025327
S. Bernards
December 23, 2008
Dear XXXXXXXXXX ,
Re: Interpretation Request - Timing of Deductibility of Damage Awards
This is in reply to your letter of September 24, 2007 in which you requested a technical interpretation with respect to the timing of deductions in respect of damage awards. Specifically, you inquired whether a deduction for damage awards can be deducted in the taxation year of the damage award irrespective of when the damage occurred or when the payment is actually made. In your opinion, McNeill v. R. 2000 D.T.C. 6211 (F.C.A.) ("McNeill") supports your position that a payment is deductible in the year of the damage award. We apologize for the delay in our response.
Unless otherwise stated in this letter, all references in this letter to a statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as enacted to the date of this letter.
Our comments
The facts in your letter appear to relate to a factual situation involving specific taxpayers. As explained in Information Circular IC70-6R3, 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. Furthermore, should your situation involve specific taxpayers and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. Nevertheless, we offer the following comments in connection with your request. These comments are of a general nature only.
Paragraph 10 of IT-467R2 (November 13, 2002) entitled "Damages, Settlements and Similar Payments" states that "an allowable deduction in respect of damages can only be claimed by a taxpayer when paid, or where there is a legal or contractual liability to pay the damages, and the amount thereof has been quantified. An amount as, or on account of, a reserve or contingent liability for anticipated damages is not deductible, by reason of paragraph 18(1)(e)."
As stated in McNeill "the basic common law rule is that a taxpayer is entitled to deduct an expense when it is incurred, and an expense is incurred when a taxpayer has an absolute and unconditional obligation to pay an amount. A contingent liability is not deductible. In the case of a damages claim against the taxpayer, it seems clear that the taxpayer's liability to pay any amount is contingent until the taxpayer's liability for damages and the quantum of damages have been finally ascertained either by the court or by binding settlement between the parties. At the time the damages are so ascertained (and not before), the taxpayer incurs an absolute and unconditional obligation to pay an amount and an expense is considered to be incurred for income tax purposes."
We further draw your attention to a Supreme Court of Canada decision in McLarty v. R., 2008 D.T.C. 6354 at paragraphs 17 and 18 for a discussion on contingent liability.
In any situation, in our view, it will be a question of fact when the liability to pay damages is ascertained and becomes an absolute and unconditional obligation giving rise to a deduction at that time.
While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the CRA in respect of any particular situation.
Yours truly,
R. Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2008
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2008