17 November 1995 External T.I. 9525895 - Damages-Wrongful Dismissal,Mental Distress

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 damages for wrongful dismissal, loss of reputation, aggravated damages, punitive damages and mental distress (lump sum amount of $50,000) are a retiring allowance

Position:

represents a retiring allowance

Reasons:

the reference to "damages" in the definition of a retiring allowance may incorporate more than damages for wrongful dismissal and thus may include other forms of damages

		952589
XXXXXXXXXX	Sandra Short

Attention: XXXXXXXXXX

November 17, 1995

Dear Sirs:

Re: Damages for Wrongful Dismissal, Mental Distress and Other

This is in reply to your request for a ruling concerning the settlement of a legal action involving damages for wrongful dismissal, loss of reputation, aggravated damages, punitive damages, mental distress as well as legal costs.

You have explained the circumstances of an employee who was employed as a headmaster in a private school who was subjected to a "witch hunt" by certain members of the employing corporation which resulted in a number of unfounded allegations being levelled against him over a period of about six months. Eventually, the employee required the intervention of a physician who referred him to a psychiatrist for stress counselling. While on sick leave, he was terminated. A legal proceeding was commenced against the employer. The claims against the employer included damages for breach of contract and wrongful dismissal, damages for loss of reputation, aggravated damages, punitive damages, damages for mental distress, special damages, prejudgment interest pursuant to the provisions of the Courts of Justice Act and costs of the actions on a solicitor and client basis.

An offer to settle has been advanced; however, there is no breakdown of the offer to settle under the various heads of damages except for a $315 reimbursement of an expense. The balance of the $50,000 offer is a lump sum. You have stated that legal fees will be in the amount of $7,000.

An advance income tax ruling cannot be issued on a no-name basis. A request for such a ruling must comply with the requirements found in Information Circular IC 70-6R2 and the Special Release dated September 30, 1992 attached thereto. While we are unable to provide you with a ruling in this intstance, we can offer the following general comments which may be of assistance to you.

As explained in paragraph 2 of Interpretation Bulletin IT-337R2, a "retiring allowance" is defined in subsection 248(1) to mean an amount ... received upon or after retirement from an office or employment in recognition of one's long service or in respect of a loss of office or employment, whether or not received as, on account or in lieu of payment of damages or pursuant to an order or judgment of a competent tribunal.

The decision in John James Young v. MNR (86 DTC 1567) found that an entire damage award was "in respect of a loss of an office or employment" and it therefore fell within the definition of "retiring allowance". After being dismissed from employment, Mr. Young sued his former employer for wrongful dismissal. In addition to damages for wrongful dismissal, the court awarded the taxpayer damages for mental distress and exemplary damages. The entire amount was treated as a retiring allowance and the taxpayer appealed to the Tax Court of Canada, contending that the damages for mental distress and the exemplary damages were damages in tort rather than damages for breach of the contract of employment.

We are not aware of any provision in the Act which would permit the exclusion from income of a portion of a settlement on account of loss of reputation, aggravated damages, punitive damages or mental distress where the payment of the amount may be considered to be "in respect of a loss of an office or employment". The reference to "damages" in the definition of a retiring allowance may incorporate more than simply damages for wrongful dismissal and thus, in our view, incorporates damages such as those mentioned by you.

The Supreme Court of Canada has had to interpret the words "in respect of" which are used in the definition of retiring allowance. In the Queen v. Savage, 83 DTC 5409, and Nowagijick v. The Queen, 83 DTC 5041, the court found that the words are

"...of the widest possible scope. They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters.

The reimbursement of legal costs are not considered part of a retiring allowance but are taxable under paragraph 56(1)(l.2) of the Act. Legal expenses related to the collection of or establishment of the right to a retiring allowance are deductible to the extent permitted under paragraph 60(o.1) of the Act.

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