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:
Damages: is a casualty insurer the payor of the damages such as an employer or is it an insurance co? does personal injury mean just physical injury or does it include mental suffering? Damages awarded for wrongful dismissal are taxable, would structuring such a payment in the manner outlined in IT-365R2 affect the income tax status of such a payment
Position:
the payor of damages does not have to be an insurance company; personal injury may include a mental component (see discussion re. damages in respect of loss of office or employment vs. damages in human rights cases); the treatment outlined in paragraph 5 of IT-365R2 is only available in respect of damages awarded for personal injury or death. Damages for wrongful dismissal are not damages in respect of personal injury or death.
Reasons:
December 20, 1995
Ottawa Tax Services HEADQUARTERS
Sandra Short
Attention: G. Obert (613) 957-2136
Client Assistance
953021
Damages paid by former employer and Structured Settlements
This is in reply to your correspondence dated November 17, 1995 which requests clarification of the comments found in paragraph 5 of Interpretation Bulletin IT-365R2 pertaining to structured settlements. You describe an enquiry received by you relating to a client's former employer who was found liable and willing to pay damages but the client would not discuss the exact nature of the damages. The client is of the opinion that by setting up the payments in the manner described in paragraph 5 of Interpretation Bulletin IT-365R2, that the payments would be rendered non-taxable. You have expressed doubts about this as you believe that an award or settlement from an employer or former employer must be examined closely to determine whether a portion of the award may be treated as employment income. Your specific questions are:
1.Is a "casualty insurer" the payor of the damages, such as an employer, or is it an insurance company?
2.Does "personal injury" mean just physical injury or does it include mental suffering as well?
3.If a former employer pays damages for wrongful dismissal, such damages would be taxable. Would structuring such a payment in the manner outlined in paragraph 5 of Interpretation Bulletin IT-365R2 affect the income tax status of such a payment?
We would comment at the outset that the client must be prepared to fully substantiate her position before any certainty or comfort can be given concerning her income tax situation with respect to any transaction. Indeed, based on the limited information provided by you, we cannot determine whether we are looking at damages for personal injury or damages "in respect of a loss of an office or employment" which are included in the definition of a retiring allowance and hence taxed under subparagraph 56(1)(a)(ii) of the Act. 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. To address your specific queries:
1.A casualty insurer is one who is primarily concerned with losses caused by injuries to persons and legal liability imposed upon the insured for such injury or for damage to the property of others. Most situations which we encounter respecting structured settlements involve a casualty insurer, also referred to as a property and casualty insurer. However, while it is possible to "structure" a settlement (that is, to pay it in periodic instalments) without the use of a casualty insurer, the defendant (employer, as the case may be) would still have to meet all conditions of paragraph 5 including that the claim being structured is clearly with respect to personal injury or death. Periodic payments with respect to personal injury awards are regarded as non-taxable where the settlement agreement or order indicates that the damages are to be paid in that manner (such payments are not considered to be annuity payments for the purposes of the Act); however, an annuity contract which is purchased by the claimant or the claimant's representative with the proceeds of a lump sum award received for damages for personal injury or death is an annuity contract for all purposes of the Act.
2.General damages when paid, and as discussed in paragraph 2 of Interpretation Bulletin IT-265R2, may include an amount for "pain and suffering". The term "pain and suffering" includes not only physical discomfort and distress but also mental and emotional trauma which are recoverable as elements of damage in torts.
Our Directorate 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" 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 in such situations would not form part of the retiring allowance and would not otherwise be subject to tax.
In order to determine the correct income 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 human rights 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. A reasonable amount allocated for damages for mental anguish or suffering may be excluded from income.
3.As discussed above, the treatment outlined in paragraph 5 of Interpretation Bulletin IT-365R2 is only available in respect of damages awarded for personal injury or death. Damages for wrongful dismissal are not damages in respect of personal injury or death.
P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Income Tax Rulings and Interpretations
Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1995
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1995
Email this Content