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 employer must withhold tax if wrongful dismissal settlement to be paid to the (wrongfully dismissed) employee's corporation
Position TAKEN:
Based on facts submitted, yes.
Reasons FOR POSITION TAKEN:
56(2)-hard to envisage circumstances under which the employee's corp. could be considered the party that is required to include the payment in income. Likely difficult for the employer to redirect the retiring allowance to another party without the concurrence of the employee or former employee
953183
XXXXXXXXXX Sandra Short
(613) 957-2136
Attention: XXXXXXXXXX
January 17, 1996
Dear Sirs:
Re: Payment of Wrongful Dismissal Settlement Paid to Third Party
This is in reply to your letter of November 15, 1995 which was addressed to the North York Tax Services Office and forwarded to us for reply. We have also received a copy of your original query dated August 24, 1995.
You have asked whether an employer has an obligation to withhold source deductions on a payment of funds in a wrongful dismissal claim if those funds are paid to a corporation. We understand that an employee was wrongfully dismissed and that the settlement may be paid to a corporation rather than to the employee directly. The former employee believes that the funds should be paid into "his" corporation and taxed at that level whereas the employer is concerned with withholding obligations imposed by the Income Tax Act (the Act).
The definition of a "retiring allowance" in subsection 248(1) of the Act includes an amount received "in respect of a loss of an office or employent of a taxpayer, whether or not received as, on account or in lieu of payment of, damages...". Thus, damages which relate to the loss of employment are required to be included in income. Subsection 153(1) requires that "every person paying at any time in a taxation year...(c) a retiring allowance...shall deduct or withhold therefrom such amount as is determined in accordance with prescribed rules...".
Where an individual entitled to receive a payment directs that such payment be paid to some other person, the amount of the payment will ordinarily be included in the individual's income by reason of subsection 56(2) of the Act even though the individual may never actually receive payment. Subsection 56(2) of the Act applies where three conditions are fulfilled:
(a) the payment or transfer is at the direction of, or with the concurrence of, the taxpayer;
(b) the payment or transfer must be for the taxpayer's benefit, or as a benefit he wished to confer on another and;
(c) the payment or transfer would have been included in the taxpayer's income if it had been paid to him.
Unfortunately, you have provided us with insufficient information to determine whether subsection 56(2) of the Act would apply to the situation outlined by you. Given that the employee was the individual wrongfully dismissed, it is hard to envisage the circumstances under which the employee's corporation could be considered the party that is required to include the payment in income. We would think that it would be difficult for the employer to redirect the retiring allowance to another party without the concurrence of the employee or former employee.
Based on the limited information provided, it is our opinion that the payment is required to be included in the employee's income and that the employer is required to withhold income tax from this payment.
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
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, 1996
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, 1996