13 November 1998 Internal T.I. 9824890 - PAYMENTS ON TERMINATION OF EMPLOYMENT

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.

Current Developments in Administrative and Employment Law

Some Things Old, Many Things New

Labour and Employment Law

Income Tax Issues Arising From Employment Termination

Revenue Canada's Views

Paul Lynch, C.A.

Manager
Deferred Income Plans Section
Income Tax Rulings and
Interpretations Directorate
Revenue Canada
Copyright of this paper remains with the Crown

INTRODUCTION

This paper addresses the income tax issues arising out of termination of employment from the perspective of Revenue Canada.

The content of this paper is as follows. It commences with an outline of the general role of Revenue Canada in administering income tax legislation and describes some of the services provided by the Department including the provision of interpretative materials and the weight that may be afforded to those materials. Next, the paper provides the broad context under which the taxation of payments arising out of termination of employment may be categorized for tax purposes. In narrowing down from the broader context it provides, in columnar format, (i) the specific sections of the Income Tax Act which are of relevance on this topic, (ii) some interpretations of Revenue Canada pertaining to this legislation, and (iii) citations and brief summaries of several court cases pertaining to the legislation and interpretations. The paper concludes with a summary of the tax withholding and reporting requirements for the various types of payments that may arise on termination of employment.

REVENUE CANADA'S ROLE

Under the general authority conferred on the Minister and Deputy Minister of National Revenue (Revenue Canada) to administer and enforce the Income Tax Act (the "Act"), a number of functions are necessarily undertaken (e.g. verification, assessments, collections, appeals etc.).

To facilitate administration of the Act in a self-assessment system, taxpayers are provided information on their obligations. Some information is legislative in nature (i.e. prescribed information - tax returns and certain forms) and other information is of a client service nature so as to facilitate self-assessment. In this latter context, the Income Tax Rulings and Interpretations Directorate (the "Directorate") interprets the provisions of the Act and related statutes and establishes Revenue Canada's policy with regard to the interpretation of the Act. Specifically, the Directorate provides: advance income tax rulings to taxpayers; technical interpretations and advice (including telephone enquiries) to field offices, taxpayers and their tax advisors; and technical publications (interpretation bulletins and the technical newsletter) for use by taxpayers and departmental staff.

The Department's view of the weight to be provided to these services is as follows. An advance tax ruling is regarded as binding upon the department (subject to the qualifications contained in the ruling and subsequent changes in law). Technical interpretations (in writing or as telephone enquiries) are not binding on the Department. Interpretation bulletins can generally be relied upon as reflecting the Department's interpretation of the law to be applied on a consistent basis by departmental staff.

A more objective pronouncement on Revenue Canada's interpretations can be found in the case Nowegijick v. The Queen 83 DTC 5041 (SCC), wherein it was stated that "administrative policy and interpretation are not determinative, but are entitled to weight and can be an important factor in case of doubt about the meaning of legislation".

Information about the service of the Directorate is contained in Information Circular No. 70-6R3, Advance Income Tax Rulings. Revenue Canada's website, www.rc.gc.ca, contains most of the Department's publications, including interpretation bulletins.

It must be pointed out, once again from a contextual perspective, that Revenue Canada applies the provisions of the Act to factual situations. Technical opinions and publications are written from a general perspective. In the case of termination payments, for example, the information provided is essentially general in nature and must be regarded as such. Nonetheless, each situation is arguably unique and the law must be applied to a specific factual situation. To complicate matters, most termination situations also involve contractual disputes, the application of common law or the application of a number of other statutes to arrive at a factual situation to which the provisions of the Act will ultimately be applied.

GENERAL TAXATION SCHEME FOR PAYMENTS ARISING ON TERMINATION OF EMPLOYMENT

For income tax purposes, amounts are to be included in income only if they arise from a source identified in the Act. Similarly, amounts may be deductible from income only if they are specifically listed in the Act.

Sources of income

The following are listed as the sources of income under the Act that may be relevant to payments arising on termination:

	•	Income from an office or employment
		(sections 5 to 7 of the Act)

	•	Income from a business or property
		(sections 9 to 37.3 of the Act)

	•	Other sources of income
		(sections 56 to 59.1 of the Act)

Deductions allowed in computing income

The following deductions may be relevant in computing income for expenses or deductions relating to termination payments:

	•	Deductions allowed in computing income from an office
		or employment (section 8 of the Act)

	•	Other deductions in computing income
		(sections 60 to 66.8 of the Act)

Interpretation and Administration of the Act

Interpretative legislation (i.e. definitions etc.) are found in sections 248 to 260 of the Act.

Administrative requirements relevant to termination payments, that is tax withholding and reporting requirements, are contained in Division I of the Act. In particular, section 153 provides the withholding requirements under the Act and is supplemented by Parts I and II of the Income Tax Regulations (sections 100 to 110 and 200 to 237) which provide additional details on tax withholding as well as the reporting requirements for such payments.

INCOME TAX CHARACTERIZATION OF TERMINATION PAYMENTS

Payments arising out of termination of employment can be characterized (in general terms) as:

• employment income, i.e. salary or wages (fully taxable and part of the individual's earned income for calculating an individual's registered retirement savings plan ("RRSP") deduction limit);
• a retiring allowance (fully taxable but tax deferred to the extent of the amount that can be transferred to a registered retirement savings plan or registered pension plan);
• an award or reimbursement of legal expenses regarding employment income or a retiring allowance (fully taxable but also generally fully deductible);
• interest income (taxable unless in respect of pre-judgment interest for wrongful dismissal or personal injury); or
• in limited circumstances, non-taxable payments on account of personal damages.

EMPLOYMENT INCOME

Legislation

Interpretation

Jurisprudence

Subsection 5(1)

" ... a taxpayer's income for a taxation year from an office or employment is the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year"

Paragraph 6(1)(a)

"There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment ... the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment ... "

"except any benefit ... derived from counselling services in respect of ... the re-employment or retirement of the taxpayer"

Subsection 6(3)

"An amount received by one person from another

(a) during a period while the payee was an officer of, or in the employment of, the payer, or
(b) on account, in lieu of payment or in satisfaction of an obligation arising out of an agreement made by the payer with the payee immediately prior to, during or immediately after a period that the payee was an officer of, or in the employment of, the payer,
shall be deemed, for the purposes of section 5, to be remuneration for the payee's services rendered as an officer or during the period of employment, unless it is established that, irrespective of when the agreement, if any, under which the amount was received was made or the form or legal effect thereof, it cannot reasonably be regarded as having been received
(c) as consideration or partial consideration for accepting the office or entering into the contract of employment,
(d) as remuneration or partial remuneration for services as an officer or under the contract of employment, or
(e) in consideration or partial consideration for a covenant with reference to what the officer or employee is, or is not, to do before or after the termination of the employment."

Paragraph 6(1)(j)

"There shall be included in computing the income of a taxpayer for a taxation year as income from an office or employment ... amounts received by the taxpayer in the year as an award or reimbursement in respect of an amount that would, if the taxpayer were entitled to no reimbursements or awards, be deductible under subsection 8(1) in computing the income of the taxpayer, except to the extent that the amounts so received

(i) are otherwise included in computing the income of the taxpayer for the year, or
(ii) are taken into account in computing the amount that is claimed under subsection 8(1) by the taxpayer for the year of a preceding taxation year"

"Retirement or loss of an office or employment does not include:

(a) transfer from one office or position to another with the same employer (or an affiliate), in a different capacity (including one with diminished responsibilities);
(b) termination of employment with an employer followed by re-employment with the employer (on a full or part-time basis) or employment with an affiliate of the employer pursuant to an arrangement made prior to the termination of employment; or
(c) termination of employment where salary and benefits continue to accrue until a later date (in such a situation, retirement or loss of employment as the case may be, will be considered to take place only at the later date)."

[from ¶3 of IT-337R3]

" ... however, if pension benefits continue to accrue to the individual the accrual indicates that there is an employment relationship, since such benefits only accrue to employees. The fact that the employer does not require an individual to report to work is not, by itself, determinative of whether the individual has retired. For example, an individual who has been given a leave of absence for educational purposes is still an employee."

[from ¶4 of IT-337R3]

" ... a payment for accumulated vacation leave is considered to be ordinary remuneration and included in the employee's income in the year of receipt pursuant to subsection 5(1) or 6(3)."

[from ¶5 of IT-337R3]

"A payment received upon or after retirement or in respect of a loss of employment pursuant to the terms of an employment contract with a former employer is generally viewed as remuneration from the former office or employment. However, in circumstances where the payment can also reasonably be regarded as being in recognition of long service or as compensation for loss of office it is considered to be a retiring allowance. Where a low (or no) salary was received before retirement in return for a so-called retiring allowance upon or after retirement from an office or employment, such an amount is more likely to be regarded as deferred compensation, taxable as income from office or employment when received rather than as a retiring allowance. Other examples of amounts that are considered income but not retiring allowances include salary, wages, accrued vacation pay, and payments in lieu of earnings for the period of a reasonable notice of termination by virtue of the terms of the taxpayer's employment (explicit or implied)."

[from ¶7 of IT-337R3]

"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. ... Damages do not include a reimbursement to a taxpayer for legal costs."

[from ¶9 of IT-337R3]

"Paragraph 6(1)(j) requires a taxpayer to include in income any award or reimbursement received ... in respect of amounts for which a deduction under paragraph 8(1)(b) is available. These amounts must be included in income to the extent that they are not otherwise so included or taken into account in computing the amount deducted under subsection 8(1)."

[from ¶19 of IT-99R4]

"Where a taxpayer receives an amount pursuant to the terms of an employment contract, the amount is to be included in computing the taxpayer's income under subsection 5(1) or section 6, whichever may be applicable, as income from an office or employment, whether or not it is received on termination of the employment. Such an amount would include, for example, salary, wages, accrued vacation pay, and an amount paid in lieu of notice of termination."

[from ¶15 of IT-365R2]

" ... it is not our position that a salary continuation payment may represent a retiring allowance where it is also treated as income from employment for the purposes of computing EI, CPP pension accruals and years of service in a registered pension plan as this would create an inconsistency in the application of various statutes administered by Revenue Canada. An amount cannot be employment income for some purposes and not for others."

[from E9802957

" ... it has been and will continue to be our position that where an analysis of the purpose for a payment will support the treatment of the amount as both a retiring allowance and as employment income, we will accept its treatment as a retiring allowance"

[from E9533408]

Doyle 83 DTC 5383 (FCTD)

( an individual, a major shareholder/director, received an amount in the year from a corporation. In that year the corporation was wound up but its business was carried on by another corporation of which the individual was also a major shareholder/director and for which he carried out the same duties. The payment was found not to be a retiring allowance as there was no retirement.

Serafini 89 DTC 653 (TCC)

( the taxpayer accepted an early retirement package that provided for a date of retirement approximately 1 year into the future, but the taxpayer did not need to report to work in the interim and collected salary and benefits up until the official retirement date. The payments received before the official retirement date were employment income and not a retiring allowance.

Friedberg 92 DTC 6031 (FCA)

( "In tax law, form matters."

OTHER INCOME - RETIRING ALLOWANCE

Legislation

Interpretation

Jurisprudence

Subparagraph 56(1)(a)(ii)

"there shall be included in computing the income of a taxpayer for a taxation year any amount received by the taxpayer in the year as, on account of, or in lieu of payment of, or in satisfaction of .... a retiring allowance"

Subsection 248(1) - retiring allowance defined

"means an amount ... received

(a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or
(b) in respect of a loss of an 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,
by the taxpayer or, after the taxpayer's death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer"

"Retirement or loss of an office or employment does not include:

(a) transfer from one office or position to another with the same employer (or an affiliate), in a different capacity (including one with diminished responsibilities);
(b) termination of employment with an employer followed by re-employment with the employer (on a full or part-time basis) or employment with an affiliate of the employer pursuant to an arrangement made prior to the termination of employment; or
(c) termination of employment where salary and benefits continue to accrue until a later date (in such a situation, retirement or loss of employment as the case may be, will be considered to take place only at the later date).

Concerning (a) above, a termination of employment which otherwise qualifies as a retirement or loss of office will not be excluded solely because a taxpayer continues as a corporate director at nominal compensation. For an example of this, see Income Tax Ruling ATR-12, Retiring Allowance. Similarly, where after the sale of the employer's active business an individual carries on certain administrative duties for the former employer for which no remuneration or director's fees are received, the individual may still be considered to have retired or lost an office or employment. Such administrative duties include collecting rents, hiring trades for general maintenance of a building, day-to-day banking and general bookkeeping. Affiliate, for the purposes of this bulletin, includes any related or associated corporation, or any corporation that is a member of a group of corporations that do not deal at arm's length, notwithstanding that they may not be related or associated for the purposes of the Act. An affiliate does not include a person who would not otherwise be related or considered affiliated but for the definition of person related to the employer contained in subparagraph 60(j.1)(iv)"

[from ¶3 of IT-337R3]

"Whether an individual has retired is a question of fact. Continued participation in a former employer's health plan (for example, providing medical, dental and long term disability coverage) for a restricted period of time would not, in itself, indicate that employment has not terminated, particularly if the employer's plan specifically permits former employees to be covered under the plan"

[from ¶4 of IT-337R3]

"To qualify as a retiring allowance, a payment must be in recognition of long service or in respect of loss of an office or employment. The term long service is usually considered to have reference to the total number of years in an employee's career with a particular employer or with affiliated employers. A payment for unused sick leave credits qualifies as a retiring allowance (see J. Camille Harel v. The Deputy Minister of Revenue of the Province of Quebec (77 DTC 5438, (1977) CTC 441))."

[from ¶5 of IT-337R3]

"The payment of an amount pursuant to a contractual obligation may, in some cases, be treated as a retiring allowance. A payment received upon or after retirement or in respect of a loss of employment pursuant to the terms of an employment contract with a former employer is generally viewed as remuneration from the former office or employment. However, in circumstances where the payment can also reasonably be regarded as being in recognition of long service or as compensation for loss of office it is considered to be a retiring allowance."

[from ¶7 of IT-337R3]

"In programs designed to encourage voluntary retirements, an employer may offer eligible employees the option of receiving an amount either as a lump sum at the time of termination or in instalments over a number of years. If an employee receives an amount that is a retiring allowance from the program and the employee chooses the instalment option on or before the employment is terminated, the instalments are taxable in the year received. ... If the instalments reflect an amount of interest income earned on the outstanding balance of a retiring allowance, the interest income is not itself a retiring allowance..."

[from ¶8 of IT-337R3]

" ... 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. ... 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."

[from ¶9 of IT-337R3]

"A retiring allowance may be paid in the form of a single payment or as a series of payments over time"

[from E9701205]

Shell 82 DTC 1369 (TRB)

( two individuals gave notice to retire and received retiring allowances. They agreed, however, to complete some work for their employer as the work was already in progress. The court held that the individuals had not "retired".

Niles 91 DTC 806 (TCC)

( a taxpayer was laid off and filed a complaint with the Ontario Human Rights Commission. The initial enquiry found no finding of discrimination nor did it make an award, but did suggest that if no settlement was achieved the matter may go higher. The employer made an offer of settlement which was accepted. The Court determined the amount to be a retiring allowance.

Albino 94 DTC 6071 (FCTD-TD)

( taxpayer received an amount, after the termination of employment, from his former employer's incentive plan. The payment was characterized as a retiring allowance and not ordinary remuneration. "... it appeared ... that the term "remuneration" was wide enough to include a retiring allowance and that there was an overlapping between paragraph 6(3)(b) on the one hand and subparagraph 56(1)(a)(ii) and subsection 248(1) on the other. ... the rule of interpretation generalia specialibus non derogant should guide the Court. Where statutory provisions overlap, the specific overrides the general."

Merrins 94 DTC 6669 (FCTD)

( a taxpayer was awarded $60,000 following arbitration proceedings initiated after being laid off by his employer. The taxpayer's argument that the amount received was compensation for the extinction of the right to have his grievance arbitrated failed and the amount was characterized as a retiring allowance.

Vachon [1996] 3 CTC 2306D

( taxpayer received $5,000 on termination of employment. Although he mentioned he had filed charges of harassment against the employer before his loss of employment, no objective evidence to substantiate the assertion was provided. The $5,000 was characterized as a retiring allowance.

Clavet [1996] 3 CTC 2338

( the taxpayers was dismissed from her employment and accepted a payment of $10,000. Her argument that the sum was to compensate her for damage suffered following her union's failure to adequately defend her rights (and as such should be non-taxable) failed. The payment was characterized as a retiring allowance.

OTHER INCOME - INTEREST & LEGAL COSTS

Legislation

Interpretation

Jurisprudence

Paragraph 12(1)(c)

"there shall be included in computing the income of a taxpayer for a taxation year as income from a business or property ... any amount received or receivable by the taxpayer in the year ... as, on account or in lieu of payment of, or in satisfaction of, interest to the extent that the interest was not included in computing the taxpayer's income for a preceding taxation year"

Paragraph 56(1)(l.1)

"there shall be included in computing the income of a taxpayer for a taxation year amounts received by the taxpayer in the year as an award or a reimbursement in respect of legal expenses (other than those relating to a division or settlement of property arising out of, or on a breakdown of, a marriage) paid to collect or establish a right to a retiring allowance ..."

"Post-judgment interest on an award of damages for wrongful dismissal, calculated from the date of the settlement or judgment, is required to be included in income under paragraph 12(1)(c) of the Income Tax Act; however, source deductions are not required to be withheld from such amounts"

[from E9727105]

"Amounts received as an award or reimbursement of legal expenses paid by a taxpayer to collect or establish a right to a retiring allowance or a benefit under a pension fund or plan (other than a benefit under the Canada Pension Plan or the Quebec Pension Plan) are required to be included in the taxpayer's income under paragraph 56(1)(l.1)."

[from ¶10 of IT-337R3]

DEDUCTIONS - LEGAL EXPENSES

Legislation

Interpretation

Jurisprudence

Paragraph 8(1)(b) - of an employee

"In computing a taxpayer's income for a taxation year from an office or employment, there may be deducted ... amounts paid by the taxpayer in the year as or on account of legal expenses incurred by the taxpayer to collect or establish a right to salary or wages owed to the taxpayer by the employer or former employer of the taxpayer"

Paragraph 60(o.1)

"There may be deducted in computing a taxpayer's income for a taxation year ... the amount, if any, by which lesser of

(i) the total of all legal expenses (other than those relating to a division or settlement of property arising out of, or on a breakdown of, a marriage) paid by the taxpayer in the year or in any of the 7 preceding taxation years to collect or establish a right to an amount of (A) ... or (B) a retiring allowance of the taxpayer or a deceased individual of whom the taxpayer was a dependant, relation or legal representative, and

(ii) the amount, if any, by which the total of all amounts each of which is (A) an amount described in clause (i) (A) or (B) (I) that is received after 1985, (II) in respect of which legal expenses described in subparagraph (i) were paid, and (III) that is included in computing the income of the taxpayer for the year or a preceding year, or (B) an amount included in computing the income of the taxpayer under paragraph 56(1)(l.1) for the year or a preceding taxation year,
exceeds the total of all amounts each of which is an amount deducted under paragraph (j), (j.01), (j.1) or (j.2) in computing the income of the taxpayer for the year or a preceding taxation year, to the extent that the amount may reasonably be considered to have been deductible as a consequence of the receipt of an amount referred to in clause (A),
exceeds

(iii) the portion of the total described in subparagraph (i) in respect of the taxpayer that may reasonably be considered to have been deductible under this paragraph in computing the income of the taxpayer for a preceding taxation year"

"Paragraph 8(1)(b) permits a deduction in computing income from an office or employment for legal expenses paid by a taxpayer in the year in collecting salary or wages owed by an employer or former employer. Legal expenses paid after 1989 are also deductible if incurred to establish a right to (or to collect) salary or wages owed by an employer or former employer."

[from ¶19 of IT-99R4]

"A deduction under paragraph 8(1)(b) is allowed only in respect of an amount "owed" by an employer. If the taxpayer is not successful in court or otherwise fails to establish that some amount is owed, no deduction for the expenses is allowed. However, failure to collect an amount established as owed to the taxpayer does not preclude a deduction under this paragraph."

[from ¶20 of IT-99R4]

"Paragraph 60(o.1) permits a deduction for legal expenses paid by a taxpayer to collect or establish a right to (a) a benefit under a pension fund or plan (other than a benefit under the Canada Pension Plan or the Quebec Pension Plan), or (b) a retiring allowance (including a right to damages for wrongful dismissal). The amount of the deduction in the year is limited to the amount included in income in the year or a preceding taxation year under paragraph 56(1)(l.1) and the amount of the retiring allowance or pension benefit received and included in income in the year or a preceding taxation year less any portion thereof that has been transferred to a registered pension plan or a registered retirement savings plan and deducted under paragraph 60(j), (j.01), (j.1) or (j.2). Any non-deductible portion of qualifying legal expenses may be carried forward and deducted in this manner in any of the seven subsequent taxation years, to the extent the taxpayer receives a further retiring allowance or benefit under a pension fund or plan (other than a benefit under the Canada Pension Plan or the Quebec Pension Plan)."

[from ¶10 of IT-337R3]

DEDUCTIONS - TRANSFER OF RETIRING ALLOWANCE

Legislation

Interpretation

Jurisprudence

Paragraph 60(j.1)

"There may be deducted in computing a taxpayer's income for a taxation year ... such part of the total of all amounts each of which is an amount paid to the taxpayer by an employer ... as a retiring allowance and included in computing the taxpayer's income for the year by virtue of subparagraph 56(1)(a)(ii) ... as

(i) is designated by the taxpayer in the taxpayer's return of income under this Part for the year,

(ii) does not exceed the amount, if any, by which the total of

(A) $2,000 multiplied by the number of years before 1996 during which the employee or former employee in respect of whom the payment was made (in this paragraph referred to as the "retiree") was employed by the employer or a person related to the employer, and

(B) $1,500 multiplied by the number by which the number of years before 1989 described in clause (A) exceeds the number that can reasonably be regarded as the equivalent number of years before 1989 in respect of which employer contributions under either a pension plan or a deferred profit sharing plan of the employer or a person related to the employer had vested in the retiree at the time of the payment
exceeds the total of

(C) all amounts deducted under this paragraph in respect of amounts paid before the year in respect of the retiree ... by the employer or a person related to the employer, or ...

(C.1) all other amounts deducted under this paragraph for the year in respect of amounts paid in the year in respect of the retiree ... by a person related to the employer, and

(D) ..., and

(iii) does not exceed the total of all amounts each of which is an amount paid by the taxpayer in the year or within 60 days after the end of the year in respect of the amount so designated

(A) as a contribution to or under a registered pension plan, other than the portion thereof deductible under paragraph (j) or 8(1)(m) in computing the taxpayer's income for the year, or

(B) as a premium ... under a registered retirement savings plan under which the taxpayer is the annuitant ... other than the portion thereof that has been designated for the purposes of paragraph (j) or (l), to the extent that it was not deducted in computing the taxpayer's income for a preceding taxation year and for the purposes of this paragraph, "person related to the employer" includes

(iv) any person whose business was acquired or continued by the employee, and

(v) a previous employer of the retiree whose service therewith is recognized in determining the retiree's pension benefits"

"Paragraph 60(j.1) provides for a deduction for all or part of a retiring allowance included in a taxpayer's income under subparagraph 56(1)(a)(ii) ... and transferred to a registered pension plan or to a registered retirement savings plan under which the taxpayer is the annuitant. The amount must be paid by an employer. ... The deduction under paragraph 60(j.1) is limited to the least of (a) such portion of the retiring allowance included in income for the year as is designated in the taxpayer's income tax return under Part I; (b) an amount by which the aggregate of: (i) $2,000 times the number of years before 1996 during which the employee or former employee in respect of whom the payment was made (referred to hereafter as the retiree ) was employed by the employer or a person related to the employer; and (ii) $1,500 times the number by which the number of years before 1989 described in (i) exceeds the number that can reasonably be regarded as the equivalent number of years before 1989 in respect of which employer contributions to a pension plan or a deferred profit sharing plan of the employer or a person related to the employer had vested in the retiree at the time of the payment of the retiring allowance; exceeds the total of (iii) all amounts deducted under paragraph 60(j.1) for amounts paid before the year in respect of the retiree (A) by the employer or a person related to the employer ... (iv) all other amounts deducted for the year under paragraph 60(j.1) for amounts paid in the year in respect of the retiree (A) by a person related to the employer ... and (v) ... and (c) the total of all amounts paid by the taxpayer in the year or within 60 days after the end of the year in respect of the amount so designated, (i) as a contribution under a registered pension plan other than any portion thereof deductible either under paragraph 8(1)(m) for current or past service contributions or under paragraph 60(j) which applies to, among other things, a transfer of superannuation benefits; or (ii) as a premium under the taxpayer's own registered retirement savings plan, other than any portion thereof that has been designated for the purposes of paragraph 60(j) (which applies to, among other things, a transfer of superannuation benefits) or paragraph 60(l) (which applies to, among other things, a refund of premium under a registered retirement savings plan) to the extent such amounts were not deducted in computing income for a preceding taxation year. Years of employment after 1995 are not counted in calculating the amount of a retiring allowance that can be transferred under paragraph 60(j.1) as the application of that paragraph is being phased out."

[from ¶12 of IT-337R3]

"For purposes of 12 above:

(a) The number of years of employment need not be continuous and there is no restriction on the length of a break between periods of service. The number of years during which the retiree was employed includes a part of a year as one year. However, if an employee is employed for part of a year by an employer and by a person related to the employer for part of the same year, then the two parts of the year would only count as one year.

(b) A person related to the employer includes not only those persons related under section 251 but also includes, by virtue of subparagraphs 60(j.1)(iv) and (v), (i) any person whose business was acquired or continued by the employer, and (ii) any previous employer of the retiree whose service therewith is recognized in determining the retiree's pension benefits. With respect to (ii), where the employer's pension plan recognizes any part of the years of service with a former employer, then all of the years of service with the former employer can be included in the total number of years described in 12(b)(i) above.

(c) The equivalent number of years of vesting for purposes of determining whether the additional $1,500 is available for particular years before 1989 is determined by reference to the terms of the particular pension or deferred profit sharing plan and can be a fractional number of years. While the number used in the calculation of the equivalent number of years may be a fraction, the number of years for which an employer has made contributions cannot.

(d) The pension plan may be registered or non-registered. If an employee buys back years of service under a pension plan and pays both the employee's and the employer's share of contributions, those years are considered to be years in which the employer made contributions to the plan that have vested to the credit of the employee and consequently the additional $1,500 referred to in 12(b)(ii) above would not be available for those years of service.

(e) Contributions to a plan have vested in a retiree when the retiring allowance is paid if the retiree at the time the retiring allowance is paid is entitled to either a pension or a lump sum amount from the plan which includes the employer's contributions.

[from ¶13 of IT-337R3]

DAMAGES - NON-TAXABLE RECEIPTS

Legislation

Interpretation

Jurisprudence

"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."

[from ¶9 of IT-337R3]

" ... our review is now complete and it remains our position that prejudgment, or pre-settlement, interest received in respect of an award for damages for personal injury, death or wrongful dismissal may be excluded from income. Accordingly, there are no withholding or reporting requirements imposed on the payer in respect of such amounts"

[from E9727105]

Young 86 DTC 1567 (TCC)

( an individual sued his former employer for wrongful dismissal and was awarded damages for mental distress and exemplary damages. The court found that the full amount of the damages was taxable as they were in respect of a loss of an office or employment.

Richardson 88 DTC 1134 (TCC)

( a loftsman agreed to move from England to work in British Columbia with the promise of several years of employment. The loftsman was laid off and sued for damages for breach of contract and was awarded $41,667. It was found as a fact that the contract agreed to in England was not an employment contract and thus the amount was non-taxable.

Bedard 91 DTC 573 (TCC)

( an individual was terminated and the reasons for termination became public. Through an arbitrator, the individual reached a settlement and received 6 months salary and $32,000 for damages. $16,000 of the settlement was found to be a retiring allowance and the other $16,000 was in for damages caused by the defamation - and was thus non-taxable.

Schwartz 96 DTC 6103 (SCC)

( the taxpayer accepted a verbal offer of employment which was subsequently rescinded. Pursuant to negotiations the taxpayer received $360,000. The amount was found to be non-taxable because the agreement to pay the amount was not specific as to whether the amount was for loss of income for future services or for non-taxable damages relating to anxiety, embarrassment and inconvenience and the amount was not a retiring allowance because employment duties had not commenced.

Stolte [1996] 2 CTC 2421

( the individual received a payment from her former employer. A portion of it was characterized as a retiring allowance and another portion was for damages (non-taxable) for the injuries the taxpayer sustained by reason of the conduct of the employer's employees while she was still employed.

Sylvia Mendes-Roux 98 DTC 3368 (TCC-I)

( an employee who was constructively dismissed sued for wrongful dismissal and a settlement of $25,376 was negotiated. On the evidence provided, the Court determined that a portion of the award was taxable and another portion attributable to factors such as damages for mental distress and costs were not taxable because they did not enter into the definition of retiring allowance.

INCOME TAX WITHHOLDING AND REPORTING REQUIREMENTS

The character of the payment arising out of termination of employment will determine the tax withholding and reporting requirements (for Canadian residents), as follows:

• employment income, i.e. salary or wages

- withhold as per payroll deductions tables and report on a T4 supplementary slip.

• a retiring allowance

- for payments less than $5,000, withhold 10% (5% for Quebec residents);
- for payments greater than $5,000 but less than $15,000, withhold 20% (10% for Quebec residents);
- for payments greater than $15,000, withhold 30% (15% for Quebec residents).

- the amount of the payment for withholding tax purposes as described above is net of the amount that the employer withholds and is transferred to the individual's RRSP pursuant to subparagraph 60(j.1)(ii).

- amounts are to be reported on form T4A Supplementary at Box 26. The amount not eligible for RRSP rollover must be indicated on the T4A Supplementary.

• an award or reimbursement of legal expenses regarding employment income or a retiring allowance

- withholding and T4 reporting is required for amounts described in paragraph 6(1)(j) of the Act, but no withholding or reporting is required for amounts described in paragraph 56(1)(l.1).

• interest income

- no withholding and report on a T5 supplementary slip.

• non-taxable payments on account of personal damages or for pre-judgment interest

- no withholding and no reporting required.
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Paul Lynch - Revenue Canada