10 July 1998 Ruling 9817343 - BREACH OF EMPLOYMENT CONTRACT, 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: Can a payment for breach of employment contract be categorized as non-taxable damages?

Position: No.

Reasons: Clearly a payment in respect of loss of office so covered in paragraph 9 of IT-337R3.

XXXXXXXXXX 								981734
M. P. Sarazin
Attention: XXXXXXXXXX 

July 10, 1998

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter dated June 25, 1998, wherein you requested an advance income tax ruling in respect of the above-referenced taxpayer.

We have reviewed the material provided with your submission and note XXXXXXXXXX (the “Taxpayer”) and his former employer entered into a binding Release and Indemnity Agreement (the “Release”) in respect of the Statement of Claim (the “Statement”) filed in the Court of Queen’s Bench of XXXXXXXXXX. Accordingly, in compliance with the Department’s policy as stated in paragraph 7 of Information Circular 70-6R3 titled “Advance Income Tax Rulings”, we are unable to provide the ruling sought.

We also note that a determination of the nature of all or a portion of the amount of a settlement agreed upon is a question of fact. However, paragraph 9 of Interpretation Bulletin IT-337R3 titled “Retiring Allowances” provides as follows:

“9. As described in 2(b) above, a retiring allowance includes an amount received in respect of a loss of office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal. Special damages, such as those received for lost (unearned) wages or employee benefits, are taxable under subsection 5(1) or paragraph 6(1)(a) if the employee retains his or her employment or is reinstated or as a retiring allowance if the employee loses his or her office or employment. An amount paid on account of or in lieu of general damages, that is, damages for loss of self-respect, humiliation, mental anguish, hurt feelings, etc., or pursuant to an order or judgment of a competent tribunal may be a retiring allowance if the payment arises from a loss of office or employment of a taxpayer. However, if a human rights tribunal awards a taxpayer an amount for general damages, the amount is normally not required to be included in income. When a loss of employment involves a human rights violation and is settled out of court, a reasonable amount in respect of general damages can be excluded from income. The determination of what is reasonable is influenced by the maximum amount that can be awarded under the applicable human rights legislation and the evidence presented in the case. Damages do not include a reimbursement to a taxpayer for legal costs.” (Underline added)

In reviewing your submission, we noticed that the Statement claims damages in respect of the loss of future income and benefits as a result of the termination of employment. Your letter states that the claim was for social and psychological stresses resulting from statements made by the employer’s representative. However, we note that the Release and the Statement do not mention damages for social or psychological stresses suffered by the Taxpayer. Since the settlement relates to the Taxpayer’s loss of office, we would find it very difficult to accept that the settlement is anything but a retiring allowance for purposes of the Income Tax Act.

Your deposit will be returned under separate cover.

Yours truly,

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