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 damages for wrongful dismissal qualify as a retiring allowance?
Position: Yes.
Reasons: Damages are in respect of a loss of office or employment.
XXXXXXXXXX
XXXXXXXXXX 982487
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX , 1998
Dear Sirs:
Re: Advance Income Tax Ruling - XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling in respect of the above-referenced taxpayer.
Our understanding of the facts, proposed transaction and purpose of the proposed transaction is as follows:
Relevant Facts
1. XXXXXXXXXX (the "Taxpayer") is an individual who is a resident of Canada for purposes of the Income Tax Act (the "Act"). The Taxpayer resides in the region serviced by the XXXXXXXXXX Tax Services Office and files his income tax returns with the XXXXXXXXXX Taxation Centre.
2. XXXXXXXXXX (the "Employer") is a corporation incorporated under the laws of Canada which at all relevant times carried on its business from its head office in XXXXXXXXXX.
3. The Taxpayer was employed by the Employer as Vice-President, Human Resources. The Taxpayer entered into a written employment agreement with the Employer on XXXXXXXXXX (the "Employment Agreement"). The Employment Agreement contained a provision (the "Parachute Clause") which entitled the Taxpayer to two years of "salary" in lieu of notice or other compensation should he be dismissed by the Employer within two years of a "takeover" of the Employer. The Employment Agreement defines the expressions salary, takeover and dismissal.
4. By XXXXXXXXXX, there was a takeover of the Employer. As a result of the takeover, the Employer's head office was relocated to XXXXXXXXXX. The Taxpayer refused to move to XXXXXXXXXX and obtained alternative employment in XXXXXXXXXX. The Taxpayer's employment with the Employer was terminated on or about XXXXXXXXXX.
5. The Taxpayer wanted to be paid his two years of salary under the Parachute Clause for being constructively dismissed within two years of a takeover of the Employer. The Employer claimed that the Taxpayer resigned voluntarily and, as such, did not have any rights to the salary under the Employment Agreement's Parachute Clause. The taxpayer commenced an action against the Employer in the XXXXXXXXXX Court of Justice (General Division), inter alia, for a declaration that he was constructively dismissed without cause by the Employer, for damages and for pre-judgment and post-judgment interest. The trial of the action was heard in XXXXXXXXXX, without a jury. The Taxpayer's claim, however, was not for specific performance of the Parachute Clause.
6. The Taxpayer's claims against the Employer were dismissed by the trial court by a judgment rendered on XXXXXXXXXX. However, notwithstanding that the trial court dismissed the Taxpayer's action, the trial judge assessed the Taxpayer's provable damages in the amount of $XXXXXXXXXX, which represented two years of salary.
7. The Taxpayer successfully appealed the judgment of the trial court to the Court of Appeal for XXXXXXXXXX. The appeal was heard by the Court of Appeal on XXXXXXXXXX and judgment allowing the appeal was rendered by that Court on XXXXXXXXXX. In allowing the appeal, the Court of Appeal found that the Taxpayer had been constructively dismissed without cause and awarded damages to the Taxpayer as measured by the trial judge as described in paragraph 6 above. The Order of the Court of Appeal which was entered in the register of the Court of Appeal in XXXXXXXXXX ordered that the judgment of the trial court be set aside and that the Taxpayer recover from the Employer the sum of $XXXXXXXXXX in damages, together with pre-judgment interest from XXXXXXXXXX in the amount of $XXXXXXXXXX and post-judgment interest thereafter until payment at an interest rate of XXXXXXXXXX% per annum.
Proposed Transaction
8. The Employer will pay to the Taxpayer the amounts ordered by the Court of Appeal including damages of $XXXXXXXXXX together with pre-judgment interest of $XXXXXXXXXX as well as any applicable post-judgment interest. These amounts have not been paid pending the results of this ruling application.
Purpose of the Proposed Transaction
9. The purpose of the proposed transaction is to pay to the Taxpayer an amount in respect of his right to damages ordered by the Court of Appeal for XXXXXXXXXX.
10. To the best of your knowledge and the knowledge of the Taxpayer, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of the Taxpayer or a related person;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed return of the Taxpayer or a related person;
(c) is under objection by the Taxpayer or a related person;
(d) is before the courts in respect of the Taxpayer or a related person; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate to the Taxpayer or a related person.
Rulings Given
Provided that the statement of facts and proposed transaction are correct and constitute a complete disclosure of all of the relevant facts, proposed transaction and purpose of the proposed transaction, and provided that the proposed transaction is completed in the manner described herein, our ruling is as follows:
A. The damages for wrongful constructive dismissal paid to the Taxpayer by the Employer, as described in paragraph 8 above, will not constitute employment income under subsection 5(1) or paragraph 6(1)(a) of the Act.
B. The damages for wrongful constructive dismissal paid to the Taxpayer by the Employer, as described in paragraph 8 above, will be a "retiring allowance" within the meaning assigned by subsection 248(1) of the Act.
The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the proposed transaction is completed within six months of the date of this letter.
It is the Department's position that pre-judgment interest paid on an award or settlement for wrongful dismissal is not taxable. However, interest payable in respect of post-judgment interest on an award or settlement for wrongful dismissal is included in the recipient's income as interest income for purposes of the Act.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1997
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1997