28 January 1998 External T.I. 9727115 - WITHHOLDING ON CERTAIN PAYMENTS

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:

Taxability and withholding on certain payments

Position:

General position given

Reasons:

972711
XXXXXXXXXX M.P. Baldwin

Attention: XXXXXXXXXX

January 28, 1998

Dear Sirs:

Re: Taxability of and withholding obligations
with respect to certain payments

This is in reply to your facsimile of October 8, 1997 requesting information and clarification on the issue of payment of monies to individuals in respect of the termination of their employment.

The determination of whether a particular payment made to an individual in respect of the termination of their employment is taxable and the tax withholding requirement and in particular whether the payment is taxable as a retiring allowance or as remuneration can only be made after reviewing all the relevant facts.

Pursuant to section 248(1) of the Income Tax Act (the "Act"), "retiring allowance" is defined as generally an amount received 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 not received as, on account of, in lieu of payment of damages or pursuant to an order or judgement of a competent tribunal.

In response to question 34 at the 1993 Revenue Canada Round Table of the Canadian Tax Conference, the Department stated

"... For the purposes of the definition of "retiring allowance" in subsection 248(1) of the Income Tax Act, 'severance pay' under ESA section 58 does constitute a retiring allowance since it is compensation for loss of employment or recognition of long service. Where an amount is paid by virtue of the terms of an employment contract to compensate an employee for the loss of employment or in recognition of long service, it will normally be considered a retiring allowance. This is not to say that any payment made upon termination of employment will qualify as a retiring allowance, but rather that a payment of an amount that would otherwise qualify as a retiring allowance will not be disqualified as a retiring allowance solely because it is made to pursuant to a contactual obligation.

Where a taxpayer receives an amount in recognition of the common law entitlement for wrongful dismissal, the department's position is as follows:

1) In case of reinstatement of employment status on a retroactive basis, the amounts received in settlement of the forgone salary, wages, or other benefits are to treated as income from employment rather than a retiring allowance.

2) The position in 1 above also is applicable where reinstatement was awarded, but the taxpayer did not return to work for his or her former employer.

3) Where a taxpayer has sued for wrongful dismissal and the court or a negotiated settlement has awarded an amount and no mention is made that the person is to be reinstated, the amount arrived at will probably be viewed as a retiring allowance as defined in subsection 248(1) of the Income Tax 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 the circumstances of the case.

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(o.1) of the Act, we refer you to paragraphs 19 to 23 of Interpretation Bulletin IT-99R4 (copy attached).

With respect to whether their is a withholding tax obligation, subsection 153(1) of Act requires an employer to withhold income tax from the amount of any remuneration, including a retiring allowance, paid to an employee or former employee in accordance with the rules set out in the Regulations.

However, when a non-cash benefit is the only form of remuneration or retiring allowance received from an employer, it becomes impractical to withhold an amount so that the employer is not required to withhold tax on the amount of such benefits. On the other hand, if a cash payment is also required, the withholding from the cash payment should be adjusted to reflect the total amount or remuneration or retiring allowance paid.

While we trust that the above comments will be of assistance, we caution you that they do not constitute an advance income tax ruling and are, accordingly, not binding upon the Department with respect to any particular transaction.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch