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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] Is an indemnity paid in lieu of the period of leave provided for in Article 2091 C.C.Q. a retirement allowance or employment income?
Position: Question of fact, usually a retiring allowance.
Reasons: Amount paid in respect of the taxpayer's loss of an office or employment.
XXXXXXXXXX 2010-035678
Catherine Ayotte,
Notary, M. Fisc.
August 12, 2010
Dear Madam,
Subject: Allowance paid in lieu of the period of leave provided for in Article 2091 C.C.Q.
This responds to your letter of February 2, 2010, in which you requested our opinion on the tax treatment of compensation paid in lieu of the notice period provided for in Article 2091 of the Civil Code of Québec (C.C.Q.). More specifically, you wish to know whether such a compensation qualifies as employment income or as a retirement allowance.
Please note that, unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
The C.C.Q. provides that a period of leave is required before terminating an indeterminate contract.
2091: "Either party to a contract with an indeterminate term may terminate it by giving notice of termination to the other party.
The notice of termination shall be given in reasonable time, taking into account, in particular, the nature of employment, the special circumstances in which it is carried on and the duration of the period of work.”
2092: "The employee may not renounce his right to obtain compensation for any injury he suffers where insufficient notice of termination is given or where the manner of resiliation is abusive.”
As stated in paragraph 9 of IT-337R4- Retiring Allowances (footnote 1), generally, compensation received by an individual from the individual’s employer or former employer on account of damages may be employment income, a retiring allowance, non-taxable damages, or a combination thereof. Such a determination is a question of fact, which requires a review of all relevant facts and documentation of each particular case.
Compensation received by an employee who is dismissed with reasonable notice is employment income (footnote 2). In principle, the employment contract continues until the end of the leave period and the parties are bound to respect their mutual obligations (footnote 3). During this period, the employee continues to receive the salary to which the employee is entitled.
Where, pursuant to the specific provisions of an employment contract, an employee receives a payment in lieu of compensation for a period of reasonable notice of termination of employment, this payment is normally considered to be income from employment. For example, the CRA considers a payment made by virtue of section 83 of the Act respecting Labour Standards (ALS) (footnote 4) to generally fall into this category.
If an amount is received in respect of the taxpayer's loss of an office or employment, whether or not the amount is received as damages or pursuant to an order or judgment, the amount will be considered a retiring allowance. It is possible that this amount may include an amount for a reasonable notice period or that salary may be taken into account in determining the amount of the damage suffered by the employee (footnote 5). For example, the CRA considers compensation paid by virtue of section 128 of the ALS (footnote 6) to generally fall into this category.
Where an amount is paid by virtue of the terms of an employment contract and the purpose of the payment is to compensate an employee for loss of employment or to recognize long service, it is normally considered a retiring allowance. This does not mean that any amount paid on termination of employment will constitute a retiring allowance, but rather that an amount paid that would otherwise qualify as a retiring allowance will not be denied as a retiring allowance solely because the payment is made pursuant to a contractual obligation.
Articles 2091 and 2092 of the C.C.Q. can be invoked for several reasons. In certain circumstances, often similar to those giving rise to compensation under ALS section 83, the payment made by the employer may be considered as wages. However, in the majority of circumstances, the compensation paid by the employer under C.C.Q Article 2092. appears to be to compensate for a prejudice caused by the absence of notice. Where Article 2091 of the C.C.Q. is not respected and compensation is paid to redress the prejudice suffered as a result of insufficient notice or where the termination of the contract of employment is made in an abusive manner, we are generally of the view that such a payment constitutes a retiring allowance since it usually serves to compensate for the loss of an office or employment.
The nature of a payment made by an employer depends on the characteristics of each situation. Usually, the employer has all the relevant information to determine the nature of the payment made. As stated in paragraph 17 of Interpretation Bulletin IT-337R4-Retiring Allowances, payments are not considered retiring allowances if the employer treats them as income from employment for purposes of calculating employment insurance contributions and benefits, accrued pension credits for purposes of the Quebec Pension Plan, the Canada Pension Plan or eligible years of service under a registered pension plan.
We hope you will find our comments of assistance.
Best regards,
Michel Lambert
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Branch.
FOOTNOTES
1 Available on the Canada Revenue Agency website at http://www.cra-arc.gc.ca/E/pub/tp/it337r4-consolid/READ-ME.html .
2 The Queen v. Atkins [1976] C.T.C 497, para. 3.
3 BICH Marie-France, Le contrat de travail, La réforme du Code civil, (Obligations, contrats nommées) p. 782, no. 114.
4 Act respecting Labour Standards, L.R.Q. c N-1.1
83. An employer who does not give the notice prescribed by section 82, or who gives insufficient notice, must pay the employee a compensatory indemnity equal to his regular wage excluding overtime for a period equal to the period or remaining period of notice to which he was entitled.
The indemnity must be paid at the time the employment is terminated or at the time the employee is laid off for a period expected to last more than six months, or at the end of a period of six months after a layoff of indeterminate length, or a layoff expected to last less than six months but which exceeds that period.
[...]
5 Supra note 2
6 128 A.L.S.
128. Where the Administrative Labour Tribunal considers that the employee has been dismissed without good and sufficient cause, the Tribunal may
(1) order the employer to reinstate the employee;
(2) order the employer to pay to the employee an indemnity up to a maximum equivalent to the wage he would normally have earned had he not been dismissed;
(3) render any other decision the Tribunal believes fair and reasonable, taking into account all the circumstances of the matter.
[...]
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