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 a lump sum received as a result of a class action suit for damages from pollution that was initiated 5 years after the taxpayer sold the land is taxable or a windfall
Position: windfall
Reasons: IT-334R2; IT-365R2
XXXXXXXXXX 2007-025505
February 19, 2008
Dear XXXXXXXXXX :
We are writing in reply to your letter of September 28, requesting our comments with respect to an unsolicited amount received for damages to property you formerly owned.
Our understanding of the facts follows.
In XXXXXXXXXX you purchased property in XXXXXXXXXX (USA) with the intention of building a residence to reside there for part of the year. Subsequently, your plans changed and you sold the property in XXXXXXXXXX and reported a taxable capital gain. You were unaware of a class action suit, which was instituted in XXXXXXXXXX on behalf of owners and former owners alleging damages caused by pollution from a chemical plant near your former property. The class action suite was filed in XXXXXXXXXX and you were informed of your interest in the matter by letter of the same date but took no action in respect of it. You received additional information in a letter dated XXXXXXXXXX, which piqued your interest and caused you to contact the law firm. In XXXXXXXXXX you received a cheque for US $XXXXXXXXXX, your share of the award for damages.
Your question is whether or not the amount of US $XXXXXXXXXX qualifies as a non-taxable windfall.
The function of Income Tax Rulings Directorate is to provide advance income tax rulings to taxpayers where proposed transactions are involved and to give technical interpretations of the various provisions of the Income Tax Act and the Income Tax Regulations in respect of hypothetical situations. Typically, a request for a written opinion on a completed transaction should be directed to your local Tax Services Office. Although we are not in a position to provide an opinion in respect of the factual situation outlined in your letter, we are prepared to offer the following general comments.
It is always a question of fact as to whether a damage/compensation receipt, either pursuant to a court judgment or an out-of-court settlement, would be considered as on account of income, capital or windfall to the recipient and whether it would be taxable. It is necessary to look at the true nature of both the purpose and the effect of the receipt. You may wish to refer to Interpretation Bulletins IT-334R2, Miscellaneous Receipts, and IT-365R2, Damages, Settlement, and Similar Receipts.
In the situation described, the award does not appear to be in respect of the acquisition or disposition of property since you no longer own the property. In all likelihood, the award would not have to be reported as a capital gain nor as a reduction to the adjusted cost base of the former property. It would appear that the receipt of your share of the award for damages from the class suit satisfies the requirements of being considered a windfall.
The above comments are only expressions of opinion on the application of the Act and, as such, should not be construed as advance income tax rulings, nor are they binding on the Canada Revenue Agency.
We trust this information is helpful.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships 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
Email this Content