13 March 2013 External T.I. 2012-0468971E5 - Retiring Allowance

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: Is the amount of $1,000, paid by an employer to its former employee pursuant to the terms of a settlement agreement, a retiring allowance? If so, what are the reporting requirements?

Position: Question of fact. It appears that the amount is indeed a retiring allowance.

Reasons: But for the loss of employment, the amount would have been received and the purpose of the payment was to compensate a loss of employment.

XXXXXXXXXX
2012-046897

March 13, 2013

Dear XXXXXXXXXX:

Re: Court Settlement for Job Search

This is in response to your email dated November 7, 2012, wherein you requested our views on whether a settlement paid by an employer to an employee was taxable pursuant to the Income Tax Act ("Act"). In the event the amount was taxable, you wanted to ascertain which were the reporting requirements pursuant to the Act.

The situation you describe in your email can be summarized as follows:

The employer terminated the employment of an employee in the province of Québec. The latter sued the employer for unlawful dismissal. A settlement agreement was reached between the employer and the employee whereby the court ordered the employer to pay an amount of $1 000 as a job search fee and a job relocation fee.

You ask whether this amount is taxable in the hands of the employee and, if so, which reporting requirements must be followed by the employer.

Our Comments

Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Ruling, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year.

Generally, an amount that an individual receives from his former employer as a result of the termination of his employment is either taxable as employment income pursuant to subsection 5(1) of the Act or as a retiring allowance pursuant to subparagraph 56(1)(a)(ii) of the Act.

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."

The Canada Revenue Agency's (CRA) general views regarding retiring allowances are set out in Interpretation Bulletin IT-337R4, Retiring Allowances. Paragraph 5 states:

A retiring allowance includes an amount received in respect of a loss of office or employment. In this context, the words "in respect of" have been held by the Courts to imply a connection between the loss of employment and the subsequent receipt, where the primary purpose of the receipt was compensation for the loss of employment. Two questions set out by the Courts to determine whether a connection exists for purposes of a retiring allowance are as follows:

1 - But for the loss of employment would the amount have been received? and,

2 - Was the purpose of the payment to compensate a loss of employment?

Only if the answer to the first question is "no" and the answer to the second question is "yes", will the amount received be considered a retiring allowance.

The determination of whether a particular amount received by an employee upon or after termination of employment constitutes employment income, a retiring allowance or damages for personal injury can only be made after a thorough review of all of the circumstances relevant to the particular situation. We note, however, that damages received in connection with a loss of employment fall within the definition of a retirement allowance. In our view, based on the terms of the settlement agreement that you have provided us, the payment the employer paid to its former employee is a retiring allowance which is to be included in taxable income. A retiring allowance must be included in a T4 slip prepared by the employer.

We trust that these comments have been of assistance.

Yours truly,

François Bordeleau, LL.B.
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch