4 June 1993 Internal T.I. 9306657 F - Wrongful Dismissal Followed by Reinstatement

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.

June 4, 1993

Attention:  E. Hammond

D.O Support Services Section

Wrongful Dismissal Followed by Reinstatement

This is in response to your memorandum of March 4, 1993 and further to our telephone conversation of May 12, 1993 (Hammond/Larochelle) regarding the enquiry from the XXXXXXXXXX District Office concerning the tax treatment to be accorded amounts received by an unnamed taxpayer, as the result of an action for wrongful dismissal. We regret the delay in providing a response. To summarize the circumstances of the case, as we understand them, are as follows:

1)     The taxpayer in question was dismissed in 1988 from his employment.

2)     The taxpayer filed a grievance charging wrongful dismissal and later sued his former employer.

3)     The arbitrator decided in the taxpayer's favour and awarded him approximately $XXXXXXXXXX which, according to the District Office, represented two years lost wages. In addition, the court order stated that the employee was to be reinstated in his former position. In response to our request for the supporting documents relating to the District Office's enquiry, you were informed that the enquiry was received by the District Office by way of phone calls and that the parties enquiring were not prepared to provide the necessary supporting material. The District Office would nevertheless appreciate our views for future guidance in similar situations

Based on the above facts the District Office has asked us to comment specifically on the following:

1.     Would the fact that the taxpayer was reinstated in his former position based on the court order have any bearing on the payment qualifying as a "retiring allowance" as that term is defined under subsection 248(1) of the Income Tax Act?.

2.     Would the answer in 1. be any different if, notwithstanding the employee was awarded reinstatement under the terms of the court order, the taxpayer did not return to work with his former employer?

3.     Would the amount received by the taxpayer be subject to CPP and UI deductions?

Our Comments:

As explained in our telephone conversation, we are unable to provide comments that would apply specifically to all situations as the facts of each case may be different. You might therefore inform the District Office that it is most important to obtain and review the pertinent documentation before offering any opinion on the tax consequences of a particular case. Should they require assistance on specific cases we will be pleased to provide a technical interpretation on the case.

In complex situations which may still be under negotiation and where a taxpayer is seeking the District Office's advice on the taxable position of the arrangement, we would suggest that they recommend to the party that they apply for an advance income tax ruling detailing the proposed transactions and the Department will consider the tax consequences and provide a firm ruling on the matter. The procedure for requesting an advance income tax ruling, as you are aware, is fully described in Information Circular 70-6R2 and the special release thereto. We would suggest that you refer the District Office to paragraph 6 thereof which states when a ruling can be provided.

Notwithstanding the above comments, we are however, prepared to provide you with the following general comments relating to the subject matter of your enquiry.

In response to the first question, we confirm the verbal advice previously provided that, in cases of reinstatement of employment status on a retroactive basis, the amounts received in settlement of the foregone salary, wages or other benefits are to be treated as income from employment rather than a retiring allowance. This position is consistent with the decision rendered in Gagnon v. MNR (61 DTC 307). This position would also be applicable where reinstatement was awarded but the taxpayer did not return to work for his/her former employer. Presumably, the court order referred to consisted of wording that provided for full reinstatement as an employee retroactive to the date of dismissal and the order was to place the employee in the approximate financial position he would have been had he not been dismissed.

We also agree with the District Office's views that in the situation where a taxpayer has sued for wrongful dismissal and the court or a negotiated settlement has awarded an amount and no mention is made that the person is to be reinstated, the amount arrived at would probably be viewed as a retiring allowance as defined in subsection 248(1) of the Act.

Since the amounts mentioned in the District Office's referral would, in our opinion, be viewed as employment income, they would be subject to deductions for CPP and UIC.

The XXXXXXXXXX District Office may be interested in our views on the following additional points which resulted from a somewhat similar situation involving a reinstatement and referred to us by another District Office.

1.     Amounts received as part of a settlement that are in respect of out-of-pocket expenses incurred as a result of the dismissal are taxable as benefits received by the employee by virtue of his employment. The extent to which the employee may deduct the expenses incurred is limited to that provided in Section 8 and, in the case of moving expenses, including real estate fees, Section 62 of the Act as long as the specific criteria set out in those provisions are met.

2.     The amount paid in respect of legal fees, is deductible under paragraph 8(1)(b) to the extent that the amount represents legal fees incurred in determining the size of the settlement and its collection. Should accounting fees also be paid in arriving at the amount of the settlement there is no corresponding provision which would allow for the deduction of fees with respect to professional accounting services.

We trust our comments will be of assistance to you.

B.W. Dath DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch