16 November 1988 Income Tax Severed Letter 5-6877 - [Wrongful Dismissal Actions Payments into Court]

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.

J.D. Jones (613) 957-2104

NOV 16 1987

Dear Sirs:

Re: Wrongful Dismissal Actions Payments into Court

This is in reply to your letter of October 20, 1988 and further to our telephone conversation of November 2, 1988 wherein you requested our opinion on whether a payment into Court in order to settle a wrongful dismissal action constitutes a "retiring allowance" within the meaning of subsection 248(1) of the Income Tax Act and is subject to withholding tax at source.

As discussed in our telephone conversation, it is our understanding that the role of the Court in these proceedings is to determine the amount to be awarded to the Plaintiff employee as a "retiring allowance" within the meaning of subsection 248(1) of the Income Tax Act, and not whether or not a payment should be made. With this in mind, we will answer your questions in the order in which they were posed.

Where a Defendant employer pays money into Court to the credit of the action commenced by the terminated employee, the payment, in our view, would constitute a "retiring allowance" within the meaning of subsection 248(1) of the Income Tax Act even though it is being paid to the Court and not directly to the former employee provided it otherwise so-qualifies. The Court, in our view, is acting in the capacity of an arbitrator in this dispute with the amount, once set by the Court, either to be paid directly to the former employee or to be paid back to the former employer with the direction to pay the amount to the former employee. Paragraph 9 of IT-337R2 states, in part, "... it is the Department's view that an amount paid in respect of a retiring allowance constitutes income of the officer or employee during his or her lifetime regardless of who actually receives the payment".

Where the Plaintiff employee does not accept the payment into Court (i.e. the Plaintiff employee appeals the decision of the Court and the Court holds the funds pending the outcome of the Appeal) the amount would not be considered to be a retiring allowance and income to the Plaintiff employee, in our view, until such time as the amount is received or receivable by the Plaintiff employee.

In the event that the payment into Court is applied in satisfaction of a judgment obtained by the Plaintiff employee against the Defendant employer, the payment would, in our view, constitute income to the Plaintiff employee as a retiring allowance provided the amount otherwise qualifies.

A payment into Court which qualifies as a "retiring allowance" within the meaning of subsection 248(1) of the Income Tax Act is subject to withholding tax at source pursuant to paragraph 153(1)(c) of the Income Tax Act as prescribed by Regulation.

We trust our comments will be of assistance.

Yours truly,

ORIGINAL BY ORIGINAL SIGNÉ PAR

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch