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.
Principal Issues: Whether settlement compensation received from a former employer is considered a retiring allowance.
Position: Generally, Yes.
Reasons: Where personal injury relates to the loss of employment, the related damage award would generally be considered a "retiring allowance". However, a reasonable amount for damages awarded separate from loss of an office or employment may not be taxable under the Act
XXXXXXXXXX
2011-040361
February 8, 2012
Dear XXXXXXXXXX :
Re: Retiring Allowance
This is in response to your written enquiry regarding the correct tax treatment of a settlement payment made to two individuals and taxed by their former employer as a non-eligible retiring allowance. We apologize for the delay in responding and acknowledge receipt of further documentation and the telephone conversations between yourself and Ms. Hooey of this office. You have enquired whether a portion of the settlement awarded is non taxable on the basis that it pertains to aggravated damages.
It is your position that the aggravated damages are not a retiring allowance since they were awarded as a result of a toxic work environment unrelated to the loss of employment. The determination of the tax treatment of a damage award is highly fact driven. We provide general comments on the tax treatment of the particular payment based on the documentation you have provided.
Amounts received from an employer for damages paid outside of an employment contract in respect of loss of employment, may be considered to be a taxable retiring allowance under paragraph 56(1)(a) of the Income Tax Act (the "Act"). A "retiring allowance" is defined in subsection 248(1) of the Act to include, "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." Where a damage award is received as a result of the termination of the employee-employer relationship to compensate for the loss of employment, the courts generally consider the award to be a retiring allowance. On the basis of the Supreme Court of Canada's decision in Nowegijick v. The Queen, [83 DTC 5041], which opined that the words "in respect of" are "... of the widest possible scope," we have taken the position that a retiring allowance can encompass all types of payments arising from an employee's loss of employment. In this regard, paragraph 11 of Interpretation Bulletin 337R4, Retiring Allowances ("IT-337R4"), states that where an individual receives compensation on account of damages for a loss of employment, the amount received will be taxed as a retiring allowance. This applies to both special damages, as well as general damages received for loss of self-respect, humiliation, mental anguish, and hurt feelings.
In contrast, damage awards not paid in respect of an office or employment fall outside of the definition of a retiring allowance. Where an amount such as a damage award does not fall within the definition of a retiring allowance, it may be considered non-taxable by the CRA if, for example, its purpose is to compensate for personal injury unrelated to the loss of employment. Taxpayers claiming that such damage payments received are for personal injuries unrelated to the loss of employment must demonstrate that the damages relate to events or actions separate from the loss of employment. In making such a determination, the CRA takes into account the amount of severance which the taxpayer would have reasonably been entitled to. If such damage award is paid, even if not for loss of employment, it may be treated as a tax-free amount as contemplated under paragraph 12 of IT-337R4. But, where the personal injury relates to the loss of employment, the related damage award would generally be considered a retiring allowance.
Based on the information provided, it would appear that a reasonable portion of the damage awards in question could be considered non-taxable should they represent payments for events or actions separate from the loss of employment.
We trust this information is helpful.
Yours truly,
Lita Krantz
Assistant Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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