10 July 2012 Internal T.I. 2011-0429401I7 - Is an award from a human rights tribunal taxable?

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: The taxpayer applied for a XXXXXXXXXX job with a school board and was unsuccessful. XXXXXXXXXX filed a complaint with the Human Rights Commission and was awarded compensation for general damages and special damages including an amount for lost income. Before the tribunal's decision, the taxpayer was hired by another school board which subsequently amalgamated with several other boards, including the one the taxpayer had originally applied to. The question is whether the taxpayer can be said to have received a retiring allowance from the amalgamated school board.

Position: No, the amount is neither employment income nor a retiring allowance.

Reasons: The definition of retiring allowance states that it includes an amount received as a result of a loss of employment. Since the taxpayer was not employed by either school board at the time the human rights action was initiated, it cannot be a retiring allowance. The case of Schwartz v. The Queen (96 DTC 6103) confirmed the loss of prospective employment does not fit the definition of retiring allowance.

							July 10, 2012

XXXXXXXXXX TSO					Income Tax Rulings Directorate
							Reorganizations Division
							Bonnie Ruttan-Morillo
Attention: XXXXXXXXXX
							2011-042940

SUBJECT: Human Rights Tribunal Award

This is in reply to your memo dated November 28, 2011, regarding the taxation of an award from the XXXXXXXXXX Human Rights Tribunal. Our understanding of the situation is as follows:

• XXXXXXXXXX applied for a XXXXXXXXXX job with a predecessor school board (“1st Board”) and was unsuccessful.
• XXXXXXXXXX filed a complaint against the 1st Board with the Human Rights Commission and was awarded compensation for general damages and special damages including an amount for lost income.
• Before the tribunal’s decision, XXXXXXXXXX was hired by another school board (“2nd Board”).
• XXXXXXXXXX, the 2nd Board amalgamated with the 1st Board and several other boards to form a successor board (“Amalgamated Board”).

Our Comments

The Canada Revenue Agency (CRA) has stated in subparagraph 8(b) of Interpretation Bulletin IT-337R4 (Consolidated), Retiring Allowances, that a retirement or loss of employment does not include a termination of employment with an employer followed by employment with an affiliate of the employer. The courts have held that a corporation formed by an amalgamation is a continuation of the predecessor corporations. In rulings document 9807305, we opined that there was no reason to treat the amalgamation of school boards differently from an amalgamation of corporations. Therefore, a payment to an employee of a predecessor board for sick leave credits was not a retiring allowance since the amalgamated board would be an affiliate of each of the predecessor boards. However, in the present case, the question is not whether there was a loss of employment when the boards amalgamated, but whether XXXXXXXXXX could be considered to have been an employee of the 1st Board by virtue of the amalgamation. We do not believe the answer to that question is yes. Although XXXXXXXXXX was eventually hired by the 2nd Board, XXXXXXXXXX was never an employee of the 1st Board. A retiring allowance is included in income as per subparagraph 56(1)(a)(ii) of the Income Tax Act (the “Act”) in the year it is received. A retiring allowance is defined in subsection 248(1) of the Act as follows:

“retiring allowance” means an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received

(a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer’s long service, or
(b) 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 judgement of a competent tribunal,

by the taxpayer or, after the taxpayer’s death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer;

Since the definition of “retiring allowance” states that it is in respect of a loss of employment, it follows that the amount received by XXXXXXXXXX can only be taxable under this provision if XXXXXXXXXX received the money as a result of a loss of employment. In the Supreme Court case Schwartz v. The Queen (96 DTC 6103), Mr. Schwartz was reassessed to include an amount in income that the Minister believed to be a retiring allowance. Mr. Schwartz had signed an employment contract and was to start work once his current contract with another employer expired in a few months.

However, the offer of employment was withdrawn before he actually started work with the employer. The Supreme Court stated that “The statutory requirement that one must be ‘in the service’ of another person to be characterized as an ‘employee’ excludes, in my opinion, any notion of prospective employment when the phrase is given its ordinary meaning.” Since Mr. Schwartz had not commenced employment, there could be no loss of office and thus, the amount could not be taxed as a retiring allowance. The Supreme Court also looked at whether it could be taxed under paragraph 3(a) of the Act as argued by the Minister. This argument was not accepted by the Court since that would give precedence to the general provision of section 3 over the detailed provisions enacted by Parliament to deal with these kinds of payments, such as retiring allowances. Thus, the amount received by Mr. Schwartz was found to be non-taxable.

The same logic applies in the current situation as XXXXXXXXXX was never an employee of the 1st Board. The damages received were as a result of the human rights violation and unrelated to a loss of employment. Therefore, no amount would be considered a retiring allowance or income from a source under paragraph 3(a) of the Act.

This is consistent with previous positions of this Directorate which found that no amount of damages received should be taxable where employment never commenced. XXXXXXXXXX.

The taxability of the interest is a separate issue. Although interest is generally taxable under paragraph 12(1)(c) of the Act, the administrative practice of the CRA is not to tax pre-judgment interest received with respect to personal injury awards. This administrative practice is explained in Income Tax Technical News #30. Therefore, since we do not believe the damages are taxable, it follows that the pre-judgment interest is not taxable either. Post-judgment interest, however, does not qualify for this administrative practice and is taxable under paragraph 12(1)(c) of the Act.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.

We trust these comments are of assistance to you.

Yours truly,

Nerill Thomas-Wilkinson
Manager
For Director
Reorganizations Division