1993 Internal T.I. 9310617 F - Damage Awards

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 10, 1993

XXXXXXXXXX District Office Business and General DivisionXXXXXXXXXX, Unit Head Source Deductions

Damage Award

XXXXXXXXXX

This is in reply to your enquiry of April 1, 1993, sent to Mr. Eric Hammond in Source Deductions Division - Head Office, in which you requested a review of the circumstances surrounding the payment received by XXXXXXXXXX in 1992 and an opinion as to whether the payment should be subject to tax and, if so, under which provision of the Income Tax Act. Your enquiry was forwarded to this Directorate for response.

In connection with your enquiry, we requested additional information and documentation concerning the complaint that XXXXXXXXXX had filed against her former employer under the Human Rights Act of British Columbia ("HRABC"). That information was forwarded with your memorandum of May 12, 1993 and proved to be most helpful in our review of the matter.

It is our understanding of the facts, as supplemented by the additional documents, that:

XXXXXXXXXX

Our Comments:

This Directorate has recently completed an in-depth review of the taxability of awards in respect of damages in human rights cases; particularly those that are coincident with the loss of office or employment by the recipient of the award. The purpose of the review was to clarify whether the use of the word "damages" in the definition of "retiring allowance" under subsection 248(1) of the Income Tax Act (the "Act") would include general damage awards for loss of self- respect, mental anguish, humiliation or hurt feelings, etc. arising from violations or alleged violations of an employee's human rights. It was our conclusion that, generally, amounts in respect of general damages would not form part of the retiring allowance and would not otherwise be subject to tax. In cases where an out-of-court settlement is reached in which a portion of the total settlement is in respect of such damages the same treatment would apply, up to an amount that would be reasonably equivalent to what a human rights tribunal would actually award if such a case were to be heard by the tribunal.

In order to determine the correct tax treatment in cases involving out- of-court settlements, all the circumstances surrounding the payment must be examined in order to establish to the Department's satisfaction that (a) human rights issues are involved that may result in the damages for which the payments are being received and (b) the amount of the payment is reasonable when compared to awards being ordered by actual tribunals under similar circumstances. Although the onus will always remain with the parties to the settlement to satisfactorily explain the nature of the amounts involved, such determinations will require the exercise of judgement.

We have reviewed the circumstances of this case as outlined above and offer the following observations:

Generally, an individual who is on maternity leave is still considered to be under an employment contract, is still expected to return to her duties of employment after a specified period of leave, and is not entitled to any payments normally associated with the termination of employment. It is our understanding of the facts presented that XXXXXXXXXX at which time she indicated her intention not to return. The resignation would normally trigger the payment of whatever severance benefits the terminating employee is entitled to. The information submitted makes no specific reference to any such payments having been made. The only payment that appears to have been made following XXXXXXXXXX's resignation is the payment of $XXXXXXXXXX in connection with the settlement of the human rights complaint filed at about the same time as her resignation.

The existence of human rights issues in this case is supported by the fact that formal complaints were actually filed under the HRABC and investigated by the Council. The fact that the two remaining complaints were ultimately withdrawn has no bearing on our determination. The withdrawal of a complaint is a normal part of the settlement process. It is also not unusual to find that the defendant to a settlement would agree to settle on a "without prejudice" basis (i.e., not admitting any liability in the matter).

In their letter of May 6, 1993 the Council indicated that the settlement amount of $XXXXXXXXXX was based on the fact that, had XXXXXXXXXX been successful in her action before the Council, the award for general damages (in respect of hurt feelings, etc.) would have been no more than $2,000 on each of the two remaining complaints, in accordance with subsection 17(2) of the HRABC. Consequently, it is our conclusion that the full amount of the settlement can reasonably be considered to be in respect of the general damages component of the human rights complaints.

In summary, it is our view that human rights issues exist to which the settlement amount of $XXXXXXXXXX in general damages reasonably relates. Consequently, the amount is not viewed as either income from an office or employment or as a retiring allowance (in respect of the loss of employment) and is not required to be included in income under any other provision of the Act.

We hope that our comments will be of assistance to you. If you require any further clarification please contact the writer.

P. D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

c.c.      Paul Remillard - Source Deduction Division