27 April 1998 External T.I. 9808755 - RETIRING ALLOWANCE

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: Would an amount received from an employer as damages for the loss of the employee’s right to become employed be exempt from taxation? (pursuant to a court decision (Schwartz))

Position: No;

Reasons: Facts of the current case and the court case are not identical.

XXXXXXXXXX 5-980875
Fouad Daaboul

April 27, 1998

Dear Sir:

Re: Request for ruling

This is in reply to your letter of March 15, 1998, wherein you requested an advance income tax ruling. We also acknowledge the information provided during our telephone conversations (XXXXXXXXXX/Daaboul) and (XXXXXXXXXX/Lynch).

As confirmed in our telephone conversation we are unable to provide the advance ruling as requested since the Schwartz case (Schwartz v. The Queen - 96 DTC 6103) is not applicable in your case. We may provide, however, the following opinions which are general in nature and may be relevant to your situation but which are not binding on the Department.

Based on the information submitted, it is our view that the proposed payment as damages for the loss of your right to become employed should be included in your income under paragraph 56(1)(a)(ii) of the Income Tax Act (the Act) as a retiring allowance. A retiring allowance is defined in subsection 248(1) of the Act to include any amount received in respect of the loss of employment, whether or not on account of or in lieu of the payment of damages.

The Federal Court - Trial Division has looked at the issue of what constitutes a retiring allowance in a similar situation in the case of Merrins v. The Queen (94 DTC 6669). In that case, the taxpayer was laid off by his employer and he filed a grievance under the relevant collective agreement on the basis that the seniority provisions had not been followed. The grievance was settled by a lump sum payment which the Department included in the taxpayer's income as a retiring allowance. The taxpayer's appeal to both the Tax Court of Canada and the Federal Court - Trial Division were dismissed on the basis that the payment in question was clearly made in respect of the loss of employment and therefore a retiring allowance.

Generally, payments made by an employer to an employee in connection with a loss or termination of employment, whether or not received as damages or pursuant to an order of a competent tribunal, are characterized as a retiring allowance. 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.

Your deposit will be sent to you under separate cover. We trust our comments will be of assistance to you. Please note that these comments represent our opinion of the law as it applies generally and, as stated in Information Circular 70-6R3, are not binding on the Department.

Yours truly,
Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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