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:
1.Does constructive dismissal constitute loss of employment for the purpose of the definition of retiring allowance in subsection 248(1) of the Act.
2.Taxation of damages received in a wrongful dismissal case.
3.Do payments made pursuant to section 45 of ESA by to employer to the Director in trust, change the nature or character of amounts? Is tax withheld and remitted by the employer or the Director?
Position:
1.If employee resigned and it can be established that there was a constructive dismissal within the meaning of section 58 of the ESA, the Department is of the view that there was a loss of employment.
2.Generally damages in wrongful dismissal cases is a retiring allowance unless relating to unpaid salary or wages or vacation pay. Awards in respect of human rights violation for mental distress are not required to be included in income to the extent they do not relate to the loss of employment.
3.The trust is a statutory trust which is not a real trust. It does not change the nature of amounts received by the Director. Tax should be withheld and remitted by the Director.
Reasons:
1.Constructive dismissal at common law occurs where an employer breaches a fundamental term of the employment contract.
2.Question 34 of the 1993 CTF Round Table, E9617771, E9527005, E9525895, F9530925, E9614961.
3.E9425847, E9640907, E9312026
5-971005
XXXXXXXXXX A. St-Amour
May 22 1997
Dear XXXXXXXXXX:
Re: Damages for wrongful dismissal
This is in response to your letter of April 15, 1997 asking that we confirm that amounts received as damages for wrongful dismissal constitute in part a retiring allowance that would qualify as an eligible retiring allowance for purposes of 60(j.1) of the Income Tax Act (the "Act") and in part general damages not subject to tax.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3 (copy attached). However, if you ask for an advance ruling, we wish to point out that your request may be refused where the transaction is to be completed at some indefinite future time. This is a long-standing position of the Department and it is stated in paragraph 15(c) of the Information Circular. The following comments are, therefore, of a general nature only, and are not binding on the Department.
Whether or not a particular payment qualifies as a retiring allowance as this term is defined in subsection 248(1) of the Act can be determined only upon reviewing all the relevant facts. Section 248(1) defines "retiring allowance" as an amount received in 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 nor received as, on account of, in lieu of payment of damages or pursuant to an order or judgment of a competent tribunal.
Whether or not there is a "loss of employment" is a question of fact. However, in a situation where the employee resigned and it can be established that there was a constructive dismissal within the meaning of section 58 of the Employment Standards Act ("ESA"), the Department is of the view that there was a loss of employment.
As stated in Question 34 of the 1993 Revenue Canada Round Table of the Canadian Tax Foundation, in general, amounts for damages received pursuant to a claim made by an employee for wrongful dismissal are included in income under subparagraph 56(1)(a)(ii) of the Act as a retiring allowance if no mention is made that the employee is to be reinstated. However, damages relating to amends due to the employee under contract for wage or salary or vacation pay, is employment income and taxable under subsection 5(1) of the Act.
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.
For example, damages received as compensation for mental distress suffered by an employee as a result of the loss of employment would be taxed as a retiring allowance. The Department acknowledges that general damages relating to human rights violations can be considered unrelated to the actual loss of employment despite the fact that the loss of employment is often a direct consequence of the human rights complaint. To the extent that damages which are awarded by a human rights tribunal, or are a settlement in lieu thereof, do not relate to the loss of employment but relate solely to damages arising from a human rights violation, such damages are not required to be included in income. In such a 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 of maximum as awards in respect of human rights violation, ranging from $2,000 in British Columbia to $10,000 in Ontario. 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 characterised as a retiring allowance for tax purposes.
Where an individual pays fees with respect to circumstances where the individual considers himself or herself to have been wrongfully dismissed, the determination of the extent that the fees are deductible normally involves a consideration of paragraphs 8(1)(b) and 60(o.1) of the Act. For comments on the deductibility of legal fees pursuant to paragraphs 8(1)(b) or 60(0.1) of the Act, we refer you to paragraphs 19 to 23 of Interpretation Bulletin IT-99R4 (copy attached).
Pursuant to clause 60(j.1)(ii)(A) of the Act, a taxpayer can transfer a retiring allowance to a registered retirement savings plan to the extent of "$2,000 multiplied by the number of years before 1996 during which the employee ...was employed by the employer or a person related to the employer." Part of a year will be counted as one full year, if the individual was employed within the meaning of the Act, during a period of time in the year, as stated in paragraph 13(a) of IT-337R2.
Section 45 of the ESA provides that where an employer fails to comply with the provisions of Part XI, an employment standards officer may order what compensation shall be paid by the employer to the Director in trust for the employee. In such a case, the Department is of the view that the trust is a trust sui juris or a statutory trust, which is not a real trust and therefore sections 104 to 108 of the Act are not applicable to such a trust. The fact that such a trust exists does not change the nature or character of amounts that the Director has received to be held in trust under the authority of the ESA. These amounts should be included in the recipient's income when received by the employee, not when paid to the Director. Furthermore, taxes should be withheld and remitted by the Director at the time the amounts are paid by the Director to the employees. Consequently, a retiring allowance received by an employee from the Director would qualify as an eligible retiring allowance for purposes of paragraph 60(j.1) of the Act.
As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, the above comments do not constitute an advance income tax ruling and are not binding on the Department. We trust the above comments will be of assistance to you. If you have any other questions do not hesitate to contact us.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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