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 $XXXXXXXXXX received as part of a settlement for mental stress, aggravated and punitive damages would be taxable? The settlement relating to the dismissal of an employee is as follows:
a) $XXXXXXXXXX - 6 month's notice (salary + commission).
b) $XXXXXXXXXX - mental distress, aggravated and punitive damages.
c) $XXXXXXXXXX - pre-judgement interest.
d) $XXXXXXXXXX - special damages for mortgage rate differential.
e) $XXXXXXXXXX - job search expenses/re-training costs.
f) legal fees totalling $XXXXXXXXXX .
1. Damages for mental stress relating to the loss of the office of employment, itself, fall within the definition of "retiring allowance" and are taxable as such.
2. 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 human rights violation, such damages are not required to be included in income. In such a case, a reasonable amount of the 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.
3. Damages that can actually be attributed to aggravated and punitive damages relating to malicious actions, intentional infliction of mental suffering, defamation, injury to reputation, by a former employer, as distinct from damages described in (1), would not be taxable.
Reasons: It is a question of fact as to the amount, if any, of the $XXXXXXXXXX in question that would be attributed to each of (1), (2) or (3) above.
A. M. Brake
July 2, 1998
Re: Damages settlement
This is in reply to your letter of February 18, 1998, relating to the receipt of an award resulting from the dismissal of the taxpayer (the "plaintiff") by his employer.
1. The plaintiff was dismissed by his employer on or about XXXXXXXXXX.
2. The plaintiff's counsel commenced correspondence with the previous employer and/or their counsel in XXXXXXXXXX, and served a Statement of Claim on or about XXXXXXXXXX.
3. At issue were the circumstances surrounding the dismissal of the plaintiff; particularly the manner in which this took place; as well as the previous employer's mis-statement of the facts to employers in the same industry; thus impeding the ability of the plaintiff to gain other employment.
4. A settlement was proposed by the previous employer that included, among other amounts, $XXXXXXXXXX for mental distress, aggravated and punitive damages. You asked us to confirm your understanding that the $XXXXXXXXXX relating to mental distress, aggravated and punitive damages would not be taxable income pursuant to paragraphs 2(b)(i) and (iii) of Interpretation Bulletin IT-365R2.
Subsection 248(1) of the Income Tax Act (the "Act") defines "retiring allowance" as 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. Accordingly, 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.
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.
The Department acknowledges that general damages relating to human rights violations can be considered unrelated to an actual loss of employment, despite the fact that the loss of employment is often a direct consequence of a human rights violations 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 human rights violation, such damages are not required to be included in income. In such a case, a reasonable amount of the 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 violations, 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.
You have stated that, in addition to the $XXXXXXXXXX being in part for mental stress, it also included an amount attributed to aggravated and punitive damages. In the event the aggravated and punitive damages are resulting from the previous employer's mis-statement of the facts to the taxpayer's prospective employers in the same industry thus impeding the ability of the taxpayer to gain other employment, punitive damages relating to such actions would generally not be taxable. Again it would be a determination of fact as to the amount of the $XXXXXXXXXX settlement that can actually be attributed to aggravated and punitive damages relating to defamation and injury to reputation by a former employer as distinct from damages relating to mental stress relating to the loss of the office of employment.
In summary, it is a question of fact as to the portion of the $XXXXXXXXXX in question that would equate to what a human rights tribunal would award in respect of pain and suffering, if any, and, the amount that could be attributed to aggravated and punitive damages relating to actions taken by the employer as distinct from the normal damages for pain and suffering relating to the loss of employment, itself, with this latter portion only being subject to tax as forming part of the retiring allowance as defined in subsection 248(1) of the Act.
The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R3, dated December 30, 1996, this is not an advance tax ruling and is therefore not binding on Revenue Canada.
We trust our comments will be of assistance to you.
Business and Publications Division
Income Tax Rulings and
Policy and Legislation Branch
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