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: Individual was dismissed from her employment and as a result of treatment she received from former employer, individual suffered mental distress which required medical intervention. Individual has negotiated settlement with former employer and as part of settlement, individual receives amount for general damages for pain and suffering. Employer has withheld tax from damages for pain or suffering.
Is amount paid as damages for pain and suffering taxable?
Position: Question of fact.
Reasons: Paragraph 9 of IT-337R3 sets out our position on the treatment of the award of damages for wrongful dismissal and the treatment of damages in respect of pain and suffering. This position is also applicable to negotiated settlements of wrongful dismissal cases. General damages are not taxable where there is sufficient evidence to conclude that the damages are for personal injury and are in respect of the loss of employment, such as human rights violations.
XXXXXXXXXX 982737
G. Moore
Dear XXXXXXXXXX:
Re: General Damages for Pain and Suffering
This is in reply to your letter of August 6, 1998, in which you requested our comments regarding the income tax treatment of general damages for pain and suffering.
As we understand the situation, your client was dismissed from her employment. You have indicated that as a result of the treatment she suffered from her former employers, your client suffered significant mental distress which required medical intervention. Litigation was commenced and damages were claimed for lost wages and benefits, along with general damages for pain and suffering. You have negotiated a settlement which obliges the employer to pay, among other amounts, $XXXXXXXXXX for general damages for pain and suffering. The employer feels obliged to withhold income taxes paid on the damages for pain and suffering. You do not believe that the damages for pain and suffering should be subject to tax, based on Interpretation Bulletin IT-365R2, Damages, Settlements, and Similar Receipts, and the court case of Louis-Philippe Bédard v. Minister of National Revenue [1991] 1 C.T.C. 2323.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only, and are not binding on the Department.
As indicated in paragraph 2 of IT-365R2, amounts in respect of damages for personal injury or death may be received by an injured taxpayer on account of general damages for pain and suffering. All amounts received by a taxpayer that qualify as general damages for personal injury or death will be excluded from income regardless of the fact that the amount of such damages may have been determined with reference to the loss of earnings of the taxpayer in respect of whom damages were awarded. However, an amount which is in respect of a loss of an office or employment, whether or not received as payment of damages, will not be excluded from income.
Whether or not a particular payment qualifies as a "retiring allowance", as defined in subsection 248(1) of the Income Tax Act (the "Act"), can be determined only upon reviewing all the relevant facts. A "retiring allowance" includes an amount received 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. As indicated in paragraph 9 of IT-337R3, Retiring Allowances, (copy enclosed), 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.
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. In such a case, a reasonable amount of a settlement in respect of the resulting general damages related to the pain and suffering would be considered non-taxable, equivalent to an amount that a human rights tribunal would be predisposed to award in that regard if it had the opportunity to consider all of the circumstances of the case.
In many jurisdictions, similar legislation provides for a ceiling for a maximum award in respect of human rights violations. A determination as to whether a negotiated settlement constitutes a reasonable amount or an amount equivalent to what a tribunal may award as damages in respect of pain and suffering would require a comparison to similar cases that have been considered by the tribunal. To the extent that the settlement amount reflects court awards under comparable circumstances, the amount received would be considered not subject to tax. Any excess, however, would be characterized as a retiring allowance for tax purposes.
You have referred to the court case of Bédard v. Minister of National Revenue as the basis that the damages for pain and suffering are not taxable. In the Bédard case, an employee was released from employment and the reasons for his dismissal were subsequently released to the media. The employee sued for damages for economic loss and for moral harm resulting from the blow to his reputation. The Court ruled that damages for defamation paid by the employer following a wrongful dismissal were not considered to be a retiring allowance. The Court decided the case by responding to the question: "Was the compensation granted the applicant directly related to the loss of employment?" The Court stated:
The Court is of the opinion that the lawmakers obviously did not, in adopting the definition of "retiring allowance", intend it to include damages of defamation that might be suffered by the occasional victim of a dismissal. The cause linking the loss of employment to the granting of damages must be efficient and not purely occasional. In short, while an amount granted to an employee after his dismissal may include damages for defamation, it is clear to the Court that any such part of the compensation granted belongs to an entirely different order of compensation that is manifestly not covered by the definition of "retiring allowance".
Whether or not the damages for pain and injury are taxable in your client's situation is a question of fact. A review of the facts as well as the relevant documentation would have to be done before a determination can be made as to whether the damages for pain and suffering to be paid by your client are in respect of the loss of employment and therefore, taxable as a "retiring allowance". In this regard, you may wish to provide all the relevant information to the Sudbury Taxation Services Office ("TSO"). We would be glad to provide assistance to the Sudbury TSO should they request it.
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,
J. Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
c.c. Mr. Norm Jeffrey
Assistant Director, Client Services
Sudbury Taxation Services Office
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