17 November 1995 External T.I. 9527005 - LOSS OF EMPLOYMENT - SETTLEMENT PAYMENT S

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 a payment received by an employee from the employer in settlement of a claim for damages resulting from alleged human rights violations is taxable as employment income, retiring allowance or not taxable at all

Position:

A review of the quantum of awards in the relevant provincial human rights jurisprudence would be required to determine whether any portion of the amount paid under the settlement could be considered non-taxable damages. Otherwise, in the circumstances, the payment would be a retiring allowance. Any reimbursed legal fees related to the portion considered to be a retiring allowance would be required to be included in income under 56(1)(l.1) and deductible to the extent permitted under 60(o.1) of the Act.

Reasons:

Evidence shows that human rights issues are involved and the non-taxable portion amounts would have to approximate what an actual tribunal might award under authority of the provincial Charter of Human Rights and Freedoms. Otherwise, the payment meets the definition of a "retiring allowance" in subsection 248(1) of the Act.

		952700
XXXXXXXXXX	J.A. Szeszycki

Attention: XXXXXXXXXX

November 17, 1995

Dear Sirs:

Re: Taxability of Lump Sum Settlement

This is in reply to your letter of October 11, 1995 in which you requested that we provide our opinion as to the proper tax treatment of amounts received by a taxpayer under the circumstances outlined in the submission and summarized below.

The circumstances detailed in your submission include the following elements:

1.The individual was employed by a company for almost XXXXXXXXXX until the spring of 1995 at which time the employee decided to quit the employment.

2.The individual filed a claim with the Superior Court of the Province of Quebec for damages totalling $XXXXXXXXXX, including damages in violation of Article 49 of the province's Charter of Human Rights and Freedoms in the amount of $XXXXXXXXXX

3.A settlement has been reached between the parties for an amount of $XXXXXXXXXX of which $XXXXXXXXXX will be paid directly to the law firm of XXXXXXXXXX in respect of legal fees.

In general, payments made by an employer to an employee in connection with a loss or termination of employment, whether or not received as damages or pursuant to an order of a competent tribunal, would be characterized as a "retiring allowance" as that term is defined in subsection 248(1) of the Income Tax Act (the "Act"). However, where the portion of the award or settlement amount that is in respect of damages can be satisfactorily shown to be related to violations of the prevailing human rights legislation, then that portion, within limits, will not be subject to tax. Whether such violations are involved and whether the amount of damages reasonably relate to those violations will always be a question of fact.

The Statement of Claim clearly indicates that alleged human rights code violations are the central issue and the circumstances are set out in sufficient detail as to constitute satisfactory evidence that the negotiated settlement that followed related to that issue. As noted above, where the Department is satisfied that such is the case, a reasonable amount of a settlement in respect of the resulting general damages related to the pain and suffering would be considered non-taxable, equivalent to an amount that a human rights tribunal would be predisposed to award in that regard if it had the opportunity to consider all of the circumstances of the case.

In many jurisdictions, similar legislation provides for a ceiling or maximum as awards in respect of human rights violations, ranging from $2,000 in British Columbia to $10,000 in Ontario. An examination of the Charter of Human Rights and Freedoms for the Province of Quebec, however, reveals that its provision for damages to victims, as referred to in Article 49, refers only to "exemplary damages" without placing a specific limit. A determination as to whether a negotiated settlement constitutes a reasonable amount or an amount equivalent to what a tribunal may award as damages in respect of pain and suffering would require a comparison to similar cases that have been considered by the tribunal.

To the extent that the settlement amount reflects court awards under comparable circumstances the amount received would be considered as not subject to tax. Any excess would, however, be characterized as a retiring allowance for tax purposes. Should the latter be the case, amounts received as a reimbursement of legal costs would be required to be included in income under paragraph 56(1)(l.1) of the Act with a deduction available under the provisions of paragraph 60(o.1) of the Act. Otherwise, amounts paid directly to the attorneys in respect of legal costs in circumstances where the settlement award is not subject to tax would not attribute to the employee as a taxable amount and no withholding would be required from the amounts paid by the employer.

While we regret that our response cannot be more definitive in this case we hope that 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