17 March 1999 External T.I. 9904015 - OUT-OF COURT SETTLEMENT - RETIRING ALLOWANCE

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: Whether an amount paid to an employee by an employer under an out-of-court settlement is taxable, and if so, is a retiring allowance?

Position: Question of fact.

Reasons: Amount received as damages arises from a loss of office or employment may be a retiring allowance unless the amount, or any portion thereof, is determined in accordance with human rights legislation which is a question of fact.

XXXXXXXXXX
5-990401
Attention: XXXXXXXXXX Fouad Daaboul

March 17, 1999

Dear Sirs:

Re: Out-of Court Settlement

This is in reply to your facsimile submission of January 28, 1999, wherein you requested our confirmation on the tax consequences of amounts allocated by an employer to an employee following an out-of court settlement.

The situation described in your letter relates to specific taxpayers and an actual fact situation. To the extent that you require assistance in determining the current tax status of the taxpayers involved, you should contact your local Taxation Services Office. If you require confirmation of the tax consequences of proposed transactions involving specific taxpayers, a written request for an advance income tax ruling should be submitted in accordance with Information Circular 70-6R3 dated December 30, 1996 and issued by Revenue Canada. Nevertheless, we can provide you with the following general comments concerning the provisions.

You indicated in your letter that the employer refused to allow the employee to return to work after October, 1997. The employee filed a lawsuit against the employer on February 12, 1998, and an out-of court settlement has been achieved. You have provided us with a copy of the taxpayer’s statement of claim but not with any documents regarding the settlement. Your questions deal with the tax consequences of two amounts as allocated under the said settlement.

Question 1

Whether an amount that is allocated under the settlement as Human Rights damages is taxable?

Our comments

As stated in paragraph 9 of Interpretation Bulletin IT-337R3, damages may be a retiring allowance if the payment arises from a loss of office or employment of a taxpayer. However, where the portion of the award of 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. It is always a question of fact whether such violations are involved and whether the amount of damages reasonably relate to those violations. Sufficient evidence would also be required to reach such a determination, such as a submission to a human rights tribunal or substantive corroborative evidence of a human rights violation. 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.

In determining what is reasonable the Department would review similar decisions made under human rights legislation. Should you find such a similar precedent, the award made in that case would be an important consideration in determining what portion of an “out-of-court” settlement for a human rights violation would not be taxable income to the recipient.

Question 2

Whether an amount representing the net amount of income that would have been paid to the employee after October, 1997 and prior to the lawsuit in February, 1998, is considered to be a “retiring allowance”.

Our comments

For the benefit of this discussion, the amount received is the gross amount allocated by the former employer before any deduction.

The term “retiring allowance” is defined subsection 248(1) of the Act to include an amount received:

“(b) in respect of a loss of an office or employment of the 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.”

The determination of whether an amount is received from an employer in respect of a loss of an office or employment is a question of fact that could only be determined after a review of all of the relevant facts of the particular situation. 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. For example, the vesting of the Income Protection Credits and payments related thereto may indicate that such amounts are not retiring allowance payments. However, in circumstances where the payment can also be 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.

We trust our comments will be of assistance to you.

Yours truly,

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