15 July 1998 External T.I. 9813585 - EMPLOYER WITHHOLDING OBL ON A 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: whether withholding tax is required from punitive damages, payment of tuition fees for retraining, severence pay, legal fee reimbursement and pre-settlement interest in respect of the above

Position: withholding is required on the retiring allowance which includes punitive damages, severence pay and the payment of tuition - no withholding or reporting requirements with respect to the legal fee reimbursement which is taxable under 56(1)(l.1) or the prejudgment interest in respect of the wrongful dismissal settlement

Reasons: def'n of retiring allowance is broad enough to include punitive damages and payments made on behalf of employee\former employee provided that such payments relate to the loss of employment

XXXXXXXXXX 981358
A. Humenuk

Attention: XXXXXXXXXX

July 15, 1998

Dear Sir:

Re: Damages for Loss of Employment

This is in reply to your letter of May 25, 1998, concerning the settlement agreement signed XXXXXXXXXX in respect of the termination of XXXXXXXXXX employment.

Written confirmation of the tax consequences relating to a proposed transaction involving specific taxpayers is only provided in response to a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R3, Advance Income Tax Rulings. As stated in paragraph 7 of Information Circular 70-6R3, an advance income tax ruling cannot be issued in respect of a completed transaction. Questions concerning a completed transaction should be directed to the local tax services office. Although we cannot provide the confirmation you seek, we offer the following general comments which may be of assistance to you.

The reimbursement of legal costs does not form part of a retiring allowance, but is included in income under paragraph 56(1)(l.1) of the Act. When an award or reimbursement of legal fees is brought into income, a deduction of the legal fees paid is available to the extent provided by paragraph 60(o.1) of the Act. The reimbursement of legal fees described in paragraph 56(1)(l.1) of the Act, however, is not a payment described in subsection 153(1) of the Act, nor is it an amount included in the definition of "remuneration" as found in subsection 100(1) of the Regulations. As a result, there is no requirement for an employer to withhold tax from such amounts or to report such amounts on an information slip.

The term, prejudgment interest, refers to interest computed for the period prior to the court order (or settlement) whereas post-judgement interest refers to interest computed from the date of the judgement or settlement. It is our general position that prejudgment or pre-settlement interest paid on an award or settlement for wrongful dismissal, may be excluded from income. Accordingly, there are no withholding or reporting requirements imposed on the payer in respect of such amounts. Interest payable in respect of any other type of retiring allowance is taxable as interest as stated in paragraph 12 of Interpretation Bulletin IT-396R, Interest Income. Although there is no withholding requirement on such interest, a T5 information slip is required.

As stated in paragraph 9 of Interpretation Bulletin IT-337R3, Retiring Allowances, an amount received as damages for the loss of employment is taxable as a retiring allowance. Thus, a retiring allowance includes any amount paid to the employee, to the former employee, or to a third party on behalf of the employee or former employee, if the amount is paid in respect of a loss of office or employment. This statement applies to punitive damages, amounts received for hurt feelings surrounding the loss of employment, and amounts received for specific damages, including the payment of tuition fees incurred by the employee or former employee as a result of the loss of employment.

With respect to the employer's obligation to withhold source deductions, paragraph 153(1)(c) of Act requires an employer to withhold income tax from the amount of any retiring allowance paid to an employee or former employee, in accordance with the rules set out in the Regulations. The withholding requirements apply equally to payments made directly to an individual and to payments made to a third party on behalf of that individual. When an amount described in subsection 153(1) of the Act is paid to a third party on behalf of an employee or former employee, and it is not feasible to withhold from that specific payment, the employer's obligation to withhold from that payment will be considered to be satisfied if the amount is included in the calculation of the tax to be withheld from other payments made to that employee. Please note that subsection 227(1) of the Act provides that no action lies against any person for deducting or withholding an amount in compliance or intended compliance with the Act.

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 thus, are not binding upon the Department with respect to any particular transaction. Copies of the above-noted Information Circular and Interpretation Bulletins are available at your local tax services office or may be accessed through the Department's internet site at: http://www.rc.gc.ca.

Yours truly,

J.F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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