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:taxation of an out of court settlement pertaining to discrimination based on sex
Position TAKEN:
-settlement allocation unreasonable based on reported awards under the Ontario Human Rights Tribunals
-amount for lost wages employment income
-a reasonable amount for mental anguish & loss of dignity would be tax exempt
-reimbursement of legal fees not taxable
Reasons FOR POSITION TAKEN:
the lost wages are not for loss of employment since she resigned voluntarily
February 9, 1995
TORONTO CENTRE TAX SERVICES Rulings Directorate
Source Deductions Division A. Humenuk
957-8953
Attention: Gary Wright
941852
Settlement of a claim under the Ontario Human Rights Code,
XXXXXXXXXX
We are replying to your memorandum of July 14, 1994 requesting assistance in determining the tax consequences relating to the proposed settlement between XXXXXXXXXX.
In connection with the enquiry, we requested a copy of the actual complaint from XXXXXXXXXX.
We enclose a copy of the complaint which XXXXXXXXXX filed with the Ontario Human Rights Commission (the Commission) in XXXXXXXXXX
It is our understanding of the facts that:
XXXXXXXXXX
Prior to offering comments on the taxation and withholding requirements of the various amounts, we would like to comment on the allocation itself:
The reasonableness of the allocation to the various component damage claims is a question of fact. In establishing a reasonable amount for general damages in a case involving a human rights issue, consideration should be given to the maximum amounts that can be awarded under the applicable provincial legislation (for example, $10,000 under the Ontario Human Rights Code) and an examination of all evidence indicating the extent to which an employee has suffered a loss of self respect, mental anguish, humiliation or hurt feelings.
At the request of XXXXXXXXXX additional representation was made by XXXXXXXXXX a lawyer familiar with the jurisprudence on the issue of damages arising from a human rights complaint, in which he asserts that the amount that can be awarded under the Ontario legislation of damages for mental anguish and injury to dignity is not limited to $10,000, citing the reasons given in the Board of Inquiry's decision in the case of Cameron v Nel-Gor Nursing Home (5 CHRR D/2170). While the amount of damages awarded for mental anguish in that case was $2,000, the Board specified that the $2,000 was restitution for a loss arising out of the infringement and was not in the category of punitive damages which are specifically limited to $10,000 by the Code. While this case has been cited in other decisions as an authority for an award of general damages under the first two lines of paragraph 40(1)(b) of the Code (thus not specifically limited to $10,000 by the Code), the claims for general damages in which this case has been cited did not, as a matter of fact, exceed $10,000.
In only one case cited by XXXXXXXXXX did the amount awarded for general damages exceed $10,000. In that case (Ghosh v Domglas Inc. et al (17 CHRR D/216)), there were 2 separate charges under the Code (discrimination under subsection 4(1) and harassment under subsection 4(2) of the Code) and 5 separate respondents. In making 8 separate awards of general damages in amounts varying from $1,000 to $3,000, the Board awarded Mr. Ghosh total damages of $11,500. It should be noted however, that the Board was able to establish that the different infringements by the various respondents constituted separate sources of mental anguish. It is interesting to note that while the total amount of the award exceeded $10,000, the Board affirmed that the damages for mental anguish arising from a cause of action, if found to be in excess of $10,000, would have been reduced to $10,000 by reason of paragraph 40(1)(b) of the Code and that awards for general damages should not routinely be assessed at $10,000 solely by reason of the statutory limitation.
In XXXXXXXXXX case, there is only one respondent (although there is the suggestion that other parties were dropped from her complaint in order to expedite the hearing) and only one charge under the Code (i.e. discrimination) notwithstanding that her complaint lists three grounds for the complaint of discrimination. Furthermore, in the remedy sought by XXXXXXXXXX, she did not seek damages for mental anguish or loss of dignity. The information provided in her letter of October 2, 1994 focuses on the mental distress caused by the delays in having her complaint addressed but does not establish any base upon which damages for mental distress caused by XXXXXXXXXX could be quantified.
Accordingly, while it is a question of fact as to what a reasonable allocation of the settlement would be, we believe that the allocation of $XXXXXXXXXX for damages arising from mental anguish and injury to dignity is not reasonable in this particular case. In support of our position, we note that XXXXXXXXXX representative had calculated the specific damages arising from the loss of promotion or reclassification to be $XXXXXXXXXX and the loss from legal fees as $XXXXXXXXXX Given that the total settlement of $XXXXXXXXXX is less than the amount claimed as specific damages arising from the loss of salary and benefits, we suggest that a more reasonable allocation be negotiated with the taxpayer. In your negotiations with XXXXXXXXXX you may wish to target an allocation for general damages between $2,000 and $5,000. In the comments which follow, we will discuss the taxation of the various components of the settlement without regard to the quantum allocated to each component.
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. Thus a reasonable amount allocated for damages for mental anguish or loss of dignity may be excluded from income.
A retiring allowance is defined in subsection 248(1) of the Act to include an amount
"in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of damages ...".
As XXXXXXXXXX resigned voluntarily, one would not expect her former employer to be responsible for restitution of losses incurred as a result of the loss of her employment. The remedy sought in her complaint was for the loss of salary incurred by reason of her former employer's failure to reclassify or promote her. In the case of The Queen v Schwartz (94 DTC 6249), the Federal Court of Appeal confirmed that an award or settlement which replaces an amount of employment income that should have been received by a complainant by virtue of his or her employment retains its nature as employment income notwithstanding that it may also be described as damages.
All amounts received in respect of, in the course of, or by virtue of an office or employment are taxable as employment income under subsection 5(1) of the Act. Based on our understanding of the facts as outlined above, it is our view that the amount of the settlement which pertains to lost wages is an amount which would be considered as remuneration in respect of an office or employment.
To the extent that the legal fees incurred in obtaining a settlement are otherwise deductible under paragraph 8(1)(b) of the Act and the reimbursement of those legal fees has not been taken into account in determining the amount of deduction under that paragraph, such a reimbursement is included in income under paragraph 6(1)(j) of the Act. However, the reimbursement of XXXXXXXXXX legal fees would not be required to be included in income provided that she does not otherwise claim a deduction for such fees in computing her employment income. Since the payer is not in a position to determine whether the reimbursement of legal fees has been used in determining the amount of the deduction available under subsection 8(1) of the Act, the employer is technically required to withhold from the amount of the reimbursement and to prepare an information slip in respect of such amount. It is our understanding that the Department is generally prepared to waive the withholding requirement in respect of such reimbursements provided that the appropriate information slip is prepared.
In summary, it is our view that source deductions are required in respect the award except to the extent that the award can be considered general damages for mental anguish or loss of dignity although it may be appropriate to waive the withholding requirement in respect of the legal fee reimbursement.
P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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