17 February 1999 External T.I. 9832815 - DAMAGES HUMAN RIGHTS VIOLATION

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:

A former employee settled her claim with her employer and was awarded the sum of $9,500.00.

The former employer allocated the entire amount as damages for mental distress as contemplated by section 41 of the Ontario Human Rights Code. Is the $9,500.00 taxable?

Position TAKEN:

There is not enough information to give a definite opinion. It is a question of

fact whether all, none or a portion of the payment is non taxable.

Reasons FOR POSITION TAKEN:

Given that there are no other amounts in the settlement, it would be reasonable that

part of the award could be taxable as a retiring allowance or payment of a severence. Since the provided information is brief, we will decline an opinion, give a general review of our position on settlement of claims and invite the representative to make a comprehensive submission to the appropriate Toronto area TSO.

XXXXXXXXXX 					5-983281
D. Miller
February 17, 1999

Dear XXXXXXXXXX:

Re: Settlement of Claim Against Employer

This is in reply to your letters of December 10 and December 14, 1998 regarding the treatment of a settlement payment received from a corporation (the “Employer”) by a former employee (the “Employee”). The Employee initiated an action against the Employer which has now been settled in a manner such that the Employer will pay the Employee the sum of $9,500.00 as damages for mental anguish as contemplated by section 41 of the Ontario Human Rights Code.

Our Comments

Written confirmation of the tax implications inherent in a particular transaction are given by this Directorate only where the transactions are proposed and the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3 (copy enclosed). The following comments are, therefore, of a general nature only, and are not binding on the Department.

Subsection 248(1) of the Income Tax Act (the “Act”) defines retiring allowance as an amount received upon or after retirement from an office or employment in recognition of one's long service or in respect of a loss of office or employment whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgement of a competent tribunal. Accordingly, 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. Where the portion of the award or settlement amount that is in respect of damages can be satisfactorily shown to be related to violations of the prevailing human rights legislation, then that portion, within limits, will not be subject to tax. Whether such violations are involved and whether the amount of damages reasonably relate to those violations will always be a question of fact.

The Department acknowledges that general damages relating to human rights violations can be considered unrelated to an actual loss of employment, despite the fact that the loss of employment is often a direct consequence of a human rights violations 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 human rights violation, such damages are not required to be included in income. In such a case, a reasonable amount of the 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 a ceiling for a maximum award 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 as not subject to tax. Any excess would, however, be characterised as a retiring allowance for tax purposes.

Whether or not the settlement is taxable in the Employee’s situation is a question of fact. In your letter of December 10th, you initially stated that, in addition to the $9,500.00 being an award for mental anguish, it also included an amount attributed to renunciation of the right to reinstatement and the execution of a general release of all claims against the former employer. In your letter of December 14th, you now indicate that the Employer has agreed to allocate the funds in the fashion which minimizes the impact of statutory deductions on the payment and is now prepared to allocate the funds as damages for mental anguish as contemplated by section 41 of the Ontario Human Rights Code. As mentioned above, a review of all the facts as well as the relevant documentation would have to be done before a determination can be made as to whether the negotiated settlement constitutes a reasonable amount or an amount equivalent to what a tribunal may award if it had the opportunity to consider all the facts. In this regard, you may wish to provide all the relevant information to the Toronto Centre Taxation Services Office (“TSO”). We would be glad to provide assistance to the TSO should they request it. We should also point out that if the

Employer is looking for a comfort letter from the Department so as not to withhold income tax deductions at source from the $9,500.00 settlement payment, such confirmation would have to be received from the TSO.

We trust that these comments will be of assistance.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch