29 August 1997 External T.I. 9713285 - AMOUNT RECEIVED IN SETTLEMENT OF PERSONAL DAMAGES

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 payment received in settlement of damages for mental distress, nuisance, inconvenience, and personal injuries due to the blowout of an oil well located on a taxpayer's property are taxable.

Position:

Likely not taxable, but cannot determine conclusively.

Reasons:

Characterization of damages for tax purposes is a question of fact. Damages for personal injury not taxable.

J. Gibbons
XXXXXXXXXX 5-971328

Attention: XXXXXXXXXX

August 29, 1997

Dear XXXXXXXXXX:

We are replying to your letter, which we received on May 21, 1997, requesting our comments regarding the tax treatment of payments received for mental distress, nuisance, inconvenience, and personal injuries due to the blowout of an oil well located on a taxpayer's property.

The characterization of damages for tax purposes is a question of fact to be determined after reviewing all of the relevant circumstances in each case. As the situation briefly outlined in your correspondence involves completed transactions and the issue is dependent on the facts, the tax status of the damages should be discussed with an audit official of your local tax services office. We are therefore not in a position to give you a definitive response. We are however prepared to provide the following general comments which may be of assistance to you.

A payment in settlement of a damages claim to avoid or terminate litigation will generally be accorded similar treatment as damages for tax purposes, even though there may be no admission of wrongdoing. In reviewing the tax repercussions of certain damage receipts, the courts have stated that the essential question is to determine what the compensation is intended to replace. Thus, damages will be treated as ordinary income if they compensate for the loss of an amount that would have been income, be it from business, property or employment sources. If the facts of the case indicate that an amount was received as compensation for loss of, or damage to, a capital asset, the amount will be a capital receipt. In this respect, we refer you to paragraphs 8 and 9 of Interpretation Bulletin IT-365R2, a copy of which is enclosed.

However, as indicated in paragraph 2 of IT-365R2, if the damages are in respect of personal injury or death, they would be excluded from income regardless of the fact that the amount of such damages may have been determined with reference to the loss of earnings of the taxpayer in respect of whom the damages are awarded.

We trust that these comments will be of assistance.

Yours truly,

C. Chouinard
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch