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 a settlement of damages for discriminatory termination of employment
Position TAKEN:
a reasonable allocation of damages for mental distress relating to the discrimination would be tax exempt but $2000 seems unreasonable in this set of circumstances
Reasons FOR POSITION TAKEN:
In the British Columbia cases heard at this time, only cases with frequent or extreme cases of harassment and discrimination were awarded $2000 for mental distress. In a similar case, $900 was awarded even though the complainant did not demonstrate any particular evidence of mental distress
A. Humenuk
XXXXXXXXXX 952302
Attention: XXXXXXXXXX
November 8, 1995
Dear Sirs:
Re: XXXXXXXXXX
Settlement of a Human Rights Complaint
We are replying to your letter of August 23, 1995 in which you ask for our view on the appropriate tax treatment of the $2,000 payment to XXXXXXXXXX in 1993 in settlement of her claim for damages arising from her complaint to the British Columbia Council of Human Rights (the Council).
In connection with your enquiry, we requested additional information and documentation concerning the complaint that XXXXXXXXXX had filed against you as her former employer under the Human Rights Act of British Columbia ("HRABC"). That information was provided on September 21, 1995 and proved to be most helpful in our review of the matter.
It is our understanding of the facts, as supplemented by the additional documentation, that:
XXXXXXXXXX
Amounts received in respect of a loss of employment, whether or not received as damages, are included in income under subparagraph 56(1)(a)(ii) of the Income Tax Act as a retiring allowance as defined in subsection 248(1) of the Act. However, in a wrongful dismissal action that also involves a violation or alleged violation of human rights, an award for general damages may also be granted in respect of mental anguish or similar suffering arising from such violation or alleged violation of the employee's human rights.
The Department acknowledges that general damages relating to the human rights violation can be considered unrelated to the actual loss of employment notwithstanding that the loss of employment forms part of the human rights complaint. To the extent that damages which are awarded by a human rights tribunal do not relate to the loss of employment but relate solely to damages arising from a human rights violation, such damages are not required to be included in income. It should be stressed that it is only that portion of general damages which are not related to the loss of employment which is eligible for the non-taxable treatment. The definition of retiring allowance is broad enough to include general damages relating to the loss of employment even though the amount is not calculated with respect to lost wages.
Where a tribunal awards damages in respect of a loss of employment but does not specify a portion to be on account of damages unrelated to the loss of employment, the whole amount of the award will be taxable as a retiring allowance. Where the amount of the payment to the complainant is settled without reference to a tribunal, an amount agreed upon for damages for hurt feelings caused by the human rights violation will be considered non-taxable provided that the amount agreed upon does not exceed the amount that would likely have been awarded by the human rights tribunal had the case been heard by the appropriate tribunal.
In British Columbia, damages awarded by the Council for hurt feelings, loss of self respect, etc. have traditionally been small, particularly where little or no evidence is presented concerning the psychological impact on the complainant of the human rights violation. In the case of Anderson v Jim Pattison Industries Ltd. (16 CHRR D/391), the Council found that the employer had discriminated against the complainant on the basis of his physical disability when the employer wrongfully terminated his employment and awarded him $900 as compensation for any mental distress suffered even though no evidence of mental distress was presented. In the cases heard in British Columbia which we reviewed involving an award of $2,000 or more for mental distress (see Ram v McDonald's Restaurants of Canada Ltd. (16 CHRR D/70) as an example), the discrimination or harassment by the employer was either frequent or shocking and a high level of mental distress of the complainant was made evident by the facts.
The agreement between XXXXXXXXXX states that no amount will be allocated to specific damages for lost wages but that $2,000 will be paid for general damages. As stated above, an amount paid as general damages is not excluded from income if it is paid in respect of a loss of employment. As XXXXXXXXXX complaint to the Council is silent on the issue of mental distress caused by the alleged discrimination, we are not in a position to determine whether the general damages were intended to relate to mental distress or to the loss of employment. However, based solely on the information presented to us, it is unlikely that the Council would have awarded $2,000 for mental distress caused by discrimination in this particular case. In the absence of a reasonable allocation of the general damages pertaining to mental distress or hurt feelings, it is our view that the entire amount would be included in income as a retiring allowance.
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
c.c. Source Deductions
Vancouver Tax Services
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