25 April 1997 External T.I. 9710505 - SETTLEMENT OF COMPLAINT WITH CDN HUMAN RIGHTS COMMI

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 an out-of-court settlement for a complaint filed with the Canadian Human Rights commission is taxable. Settlement is for lost wages, interest on lost wages and "general damages."

Position:

"lost wages" is for 13 week unpaid period while employee waited for long term disability to commence (employee did not have sufficient seniority to receive wages during this period and the reason somehow relates to the unexplained alleged human rights violation). Based on info provided, wages are taxable and subject to ordinary withholding, interest is taxable but no withholding. General damages are not taxable to the extent that human rights issues are involved and the amount is reasonable given what actual tribunals under similar circumstances would pay

Reasons:E9306799, 941852

Sandra Short
XXXXXXXXXX 971050

Attention: XXXXXXXXXX

April 25, 1997

Dear Sirs:

Re: Settlement of complaint filed with Canadian Human Rights Commission

This is in reply to your request of April 15, 1997, concerning the tax status of a proposed payment to an employee of your department. The payment is in settlement of a complaint filed by the employee with the Canadian Human Rights Commission. The employee is to receive an amount for lost wages, interest on lost wages and an amount for "general damages." The employee will remain employed by your department.

In our telephone conversation of April 25, 1997 (XXXXXXXXXX/Short), it was explained that the "general damages" component of the award is approximately $2,500 and addresses the employee's allegations of human rights violations. The lost wages relate to the thirteen-week period during which the employee received no salary or wages and before long term disability benefits commenced.

Our Comments:

It is our opinion that the payment for lost wages, and the interest associated with this payment, is taxable. The payment for general damages may not be taxable, as discussed below.

Paragraph 2 of Interpretation Bulletin IT-365R2 explains that all amounts received by a taxpayer that qualify as special or general damages for personal injury will be excluded from income. However, an amount which can reasonably be considered to be income from employment rather than an award of damages will not be excluded from income. In order to determine the correct 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 human rights issues are involved that may result in the damages for which the payment is being made and, secondly, that the amount of the payment is reasonable when compared to awards being ordered by actual tribunals under similar circumstances. The onus remains with the parties to the settlement to satisfactorily explain the nature of the amounts involved. We have received insufficient information to comment on the reasonableness of the $2,500 general damages amount but can only advise that, to the extent that the amount is reasonable in the circumstances, it will not be taxable to the recipient.

We trust our comments will be of assistance to you.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch