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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether an ex gratia payment authorized by a P.C. order in council in connection with a wrongful dismissal grievance is taxable.
Position TAKEN:
Yes! Depending on facts, some of which were unavailable, it should be treated either as employment income or a retiring allowance.
Reasons FOR POSITION TAKEN:
Payment, although ex gratia, was clearly related to the loss of employment or intended to restore the taxpayer's income as part of a reinstatement.
October 11, 1994
Assessment of Returns Directorate Head Office
T1 Programs Division Rulings Directorate
T1 Assessment & Reassessment J.A. Szeszycki
Programs Section (613) 957-8953
Nancy Kelly, Chief
941816
Taxation of Ex Gratia Payment
This is in reply to your memorandum of July 14, 1994 in which you requested our assistance in determining whether an ex gratia payment received by XXXXXXXXXX, in connection with a wrongful dismissal settlement, is considered taxable.
From the documents submitted with your enquiry, our understanding of the circumstances surrounding the settlement can be summarized as follows:
XXXXXXXXXX
It is the taxpayer's understanding that since the payment was recommended and paid by order in council on an ex gratia basis, the payment should be exempt from tax. The taxpayer's representative appears to argue that the term "ex gratia" means that it is free, that is, free from tax.
As stated by XXXXXXXXXX representative, the term "ex gratia" is defined in Black's Law Dictionary as
"...out of grace; as a matter of grace, favour, or indulgence; gratuitous. A term applied to anything accorded as a favour; as distinguished from that which may be demanded ex debito, as a matter of right."
The same source goes on to also define the term "ex gratia payment" as follows:
"...Payment made by one who recognizes no legal obligation to pay but who makes payment to avoid greater expense as in a case of a settlement by an insurance company to avoid costs of a suit. A payment without legal obligation."
The representative, in our view, is incorrectly interpreting the absence of a legal, or contractual, obligation to make a particular payment as meaning that it should be free from tax consequences. The gratuitous nature of a payment simply recognizes that it is made free from any legal obligation to make it but does not extend to its taxability.
A recent case, Blaker v. the Queen 93 DTC 1025, provides an illustration of the taxability of an ex gratia payment. Mr. Blaker was given an appointment by the Governor in Council to the National Parole Board for a period of ten years. After less than a year as a member of the Board he was forced to cease performing his duties due to poor health. He offered to resign in exchange for compensation. A settlement was reached providing Mr. Blaker with an ex gratia payment of $90,000 in exchange for the resignation. Mr. Blaker's argument was similar to that being made in this enquiry, that the ex gratia nature of the payment should mean it is tax free. In dismissing the appeal the Court stated:
"The wording of 'retiring allowance' in section 248 makes it perfectly clear that whether an amount is paid ex gratia or as a result of a legal action against a former employer, the amount is still going to be caught within the definition of 'retiring allowance' and will be required to be included in computing income..."
It is our view, based on the circumstances presented, that the payment received by XXXXXXXXXX was made in respect of his employment or the loss of his employment.
In a letter dated February 9, 1988 addressed to XXXXXXXXXX, a XXXXXXXXXX official quoted, verbatim, the decision of the XXXXXXXXXX after his review of the grievance. The decision, or settlement, contained two basic elements:
(a) XXXXXXXXXX
(b) XXXXXXXXXX
It is clear from the wording of the decision that upon his discharge in 1986 the taxpayer became entitled to superannuation under the XXXXXXXXXX based on his years of service up to that point. It is not clear from the documents enclosed with the enquiry whether the re-enrolment went beyond a reinstatement of rank and seniority and included a reinstatement of years of service for future superannuation purposes. A complete reinstatement which erases the effects of the earlier discharge would mean that the 1990 payment received would be characterized as employment income and subject to the normal withholding requirements. In addition, if the years of absence are to be included as years of service then the superannuation payments received to the date of re-enrolment would effectively be returned converting the amounts actually received into employment income as well.
If it is the case that his superannuation payments are not being recovered and the years of service reinstated, then the 1990 payment received would be properly characterized, in our view, as a retiring allowance having been paid in respect of the loss of office or employment.
We hope our comments will assist you in responding to the taxpayer and his representative.
B.W. Dath
Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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