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 relating to sexual discrimination and harassment are part of the retiring allowance
Position:
the facts of this particular situation indicate that the $10,000 in damages for harassment is not taxable and no withholding is required from such payment or from the $2500 legal fee reimbursement which is included in income under 56(1)(l.1)
Reasons:
similar to other positions taken in E9418527 & e9527005
April 24, 1996
Kitchener Tax Services Office Headquarters
David Bell, Assistant Director A. Humenuk
Revenue Collections Division 957-8953
Attention: Bruce Nearing
960154
Settlement for Wrongful Dismissal
XXXXXXXXXX
We are replying to your memorandum of January 10, 1996 requesting assistance in determining the tax consequences relating to the proposed settlement between XXXXXXXXXX
Based on the information you submitted to us, our understanding of the relevant facts is as follows:
XXXXXXXXXX
You have asked for our assistance in determining what portion, if any, of the settlement should be included in income and whether source deductions are required.
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 or judgment 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, when a portion of the award or settlement in respect of damages can be satisfactorily shown to be damages for 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 is always a question of fact.
The complaint filed by XXXXXXXXXX with the Commission clearly indicates that the central issue involves a violation of the human rights code of Ontario. Furthermore, the circumstances are set out in sufficient detail as to constitute satisfactory evidence that the allocation of damages in the amount of $10,000 agreed to by the parties, is reasonable and consistent with what has been awarded by human rights tribunals in similar circumstances in the province of Ontario. As noted above, when we are satisfied that such is the case, that portion of the settlement which is payable for the mental anguish, loss of self respect or other suffering of the complainant because of the human rights violation would be considered non-taxable. In our view, a reasonable allocation should not exceed the amount which the human rights tribunal would be predisposed to award, if it had the opportunity to consider all of the circumstances of the case. Since XXXXXXXXXX settlement is within reasonable limits, given the circumstances described in her complaint, no withholding is required on the $10,000 payable as compensation for general damages relating to the complaint of sexual harassment.
With respect to the $2,500 allocated for legal fees, amounts received as a reimbursement of legal costs are included in income under paragraph 56(1)(l.1) of the Act but are deductible under the provisions of paragraph 60(o.1) of the Act. Hence, no withholding is required in respect of the amount so reimbursed.
In summary, it is our view that source deductions are not required in respect of the $12,500 allocated to the reimbursement of legal fees and damages arising from the sexual harassment but would be required for the $10,000 payable in respect of lost wages.
John F. Oulton
Section Chief
Business, Property & Personal Section
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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