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.
May 28 1986
SMALL BUSINESS AND GENERAL DIVISION R.B. Day 957-2110
Re: Breach of Employment Contract - Settlement
We are writing in reply to your memorandum of February 17, 1986 wherein you requested our opinion as to whether the settlement payments received by XXXX (the "taxpayer") would be taxable in his hands.
Our understanding of the facts in this case is as follows:
XXXX
Taxpayer's Position
The taxpayer takes the view that the non-payment of the bonus due was a breach of contract and tantamount to unlawful dismissal. XXXX has agreed with this analysis and are prepared to so state in writing XXXX view of the foregoing, it is the taxpayer's view that the XXXX settlement would be non-taxable damages pursuant to paragraph 4 of IT-363R .
XXXX
It is our view that the settlement offered in payment of a portion of the amount payable under the bonus provisions in the employment contract and would be taxable in his hands upon receipt.
Our Opinion
Paragraph 1 of IT-365R states that it would involve a finding or fact as to whether or not an amount received as settlement would be income or non-taxable damages. It is our view that the facts in this case indicate that the taxpayer threatened suit in an effort to recover income due to him in the form of unpaid bonuses. Since the amount offered as settlement represents some 50% of the unpaid bonus, it is our opinion that the threat of litigation does not alter the income character of the settlement. As a consequence, it is our view that settlement offer would constitute income from an office or employment and taxable in the taxpayer's hands under subsection 5(1). Although not completely on point, some support for this position can be found in paragraph 7 of IT-365R .
It is also our view that the taxpayer's resignation from XXXX cannot be construed as wrongful dismissal and paragraph 4 of IT-365R would not apply in this situation.
ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR
P.D. FUOCO for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
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© Her Majesty the Queen in Right of Canada, 1986
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© Sa Majesté la Reine du Chef du Canada, 1986
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