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 prejudgment & post-judgment interest on wrongful dismissal awards is taxable
Position:
prejudgment interest may be excluded from income but post-judgment interest is taxable under 12(1)(c) - no withholding required on either
Reasons:
the position taken in the Revenue Canada April 1985 press release remains in force for prejudgment interest received in respect of personal injury, death, WCB awards or wrongful dismissal - the position does not extend to any other prejudgment interest, including interest on an award of salary
XXXXXXXXXX 942146
A. Humenuk
Attention: XXXXXXXXXX
May 11, 1998
Dear Sir:
Re: Wrongful Dismissal Awards
This is in reply to your letter of August 15, 1994 concerning the reporting and withholding requirements applicable to certain amounts paid by a former employer to a former employee. We apologize for the delay in our response.
You asked us to confirm the Department’s position with respect to the payment of prejudgment interest and the reimbursement of legal fees in respect of an action for wrongful dismissal.
As you are aware, our position with respect to prejudgment interest has been under review. Our review is now complete and it remains our position that prejudgment, or pre-settlement, interest received in respect of an award for damages for personal injury, death or wrongful dismissal may be excluded from income. Accordingly, there are no withholding or reporting requirements imposed on the payer in respect of such amounts. Post-judgment interest, calculated from the date of the settlement or judgment, is required to be included in income under paragraph 12(1)(c) of the the Income Tax Act (the "Act"); however, source deductions are not required to be withheld from such amounts.
Amounts paid for the reimbursement of legal costs incurred by a former employee in negotiating or settling a wrongful dismissal action are included in income under paragraph 56(1)(l.1) of the Act and are not considered part of the retiring allowance under paragraph 56(1)(a)(ii) of the Act. Such reimbursements are not subject to withholding under section 153 of the Act.
We trust that these comments will be of assistance.
Yours truly,
P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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