22 August 1989 Ministerial Letter 74108 F - Damage Settlement for Wrongful Dismissal

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.

SUBJECT:  Damage Settlements for Wrongful Dismissal

This is in reply to your memoranda of July 6 and 7, 1989 wherein you requested our opinion on the taxation of certain amounts received by a taxpayer on the settlement of a suit initiated for wrongful dismissal from employment.

Based upon the information submitted with your memorandum, the settlement provides for the following payments to the taxpayer:

24(1)

Based upon the above payments you have asked for our opinion on whether the

24(1)

As a variation to this situation, you have asked for our opinion on the tax treatment of forgiveness of a loan made by the employer to the employee where the individual was 24(1) In addition, you have asked for our opinion on the forgiveness of a loan where the individual was not necessarily entitled to a retiring allowance and the employer forgave the loan on the termination of the employee's employment.

Based upon the information submitted with your memorandum, it is our view that the payment of 24(1) is taxable pursuant to subparagraph 56(1)(a)(ii) of the Income Tax Act (the "Act")  as a retiring allowance.  This position is consistent with the decision rendered in John James Young vs. M.N.R. (86 DTC 1567).

Concerning the amount of 24(1) previously paid by the employer in respect of January and February 1987, as discussed in out telephone conversation (Wilson/Jones) of July 27, 1989, we are of the view that this is the amount the taxpayer received as employment income for 1987 prior to his dismissal.  As indicated in the calculation of damages attached to your memorandum, the award was determined by first calculating the individuals salary on an annual basis 24(1) and then deducting from this amount the sum of 24(1) being the amount already paid to him for January 1, 1987 to his departure date of February 12, 1987.  For 1988, the damages were to relate to a period ending May 31, 1988  24(1) less the amount of 24(1) paid for per diem work.

We would point ut that as this appears to be a "Human Rights Settlement", it may be that the other amounts received as damages for compensation for salary 24(1) for 1987 and 24(1) for 1988) should be taxed as salary and benefits depending upon the wording of the order for the damages.  This may arise where the order involved a reinstatement of employment as often happens in these situations.

With respect to the forgiveness of the employee loan in the above situation, we concur with your view that there is no forgiveness of the loan as the amount is repaid by the employee to the employer from the total proceeds of the settlement.  In the situation where an individual was, by contract, entitled to a retiring allowance in the amount of 24(1) and the retiring allowance was paid in whole or impart through the forgiveness of a loan made by the employer to the employee, we concur with your view that the amount to be included in the taxpayer's income pursuant to subparagraph 56(1)(a)(ii) of the Act as a retiring allowance would be 24(1).  In the situation where the individual was not necessarily entitled to a retiring allowance and the employer forgave a loan to the employee which was outstanding on the termination of the individual's employment, it is a question of fact as to whether or not any particular amount will form part of a retiring allowance as defined in subsection 248(1) of the Act.  The circumstances surrounding the forgiveness of the loan would have to be examined to determine if it is taxable as an advance, salary or a retiring allowance.  If it cannot be considered to be any of these, the provisions of section 80 of the Act would apply.  This position is detailed in IT-222R.

B.W. DathDirectorSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch