15 March 2011 External T.I. 2010-0391431E5 - Settlement - general damages

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 a settlement amount for general damages, following a loss of employment, is non-taxable or a retiring allowance?

Position: Question of fact.

Reasons: As noted in paragraph 12 of IT-337R4, only where general damages are received in respect of personal injuries sustained before or after the loss of employment (for example, in situations of harassment during employment or defamation after dismissal), or where a loss of employment involves a human rights violation and is settled out of court, will general damages be viewed as unrelated to the loss of employment and therefore non-taxable.

XXXXXXXXXX 								2010-039143
									P. Waugh
March 15, 2011

Dear XXXXXXXXXX :

Re: General damages

I am writing in response to your letter of December 20, 2010 concerning the tax treatment of a settlement payment between an individual and his/her employer. More specifically, you have enquired whether the portion of the settlement payment relating to general damages is considered taxable income.

In the situation you described, a taxpayer working for XXXXXXXXXX years as a XXXXXXXXXX and filed a complaint with his/her employer under the employer's XXXXXXXXXX policy on XXXXXXXXXX . On XXXXXXXXXX , a grievance was filed on the basis that XXXXXXXXXX . On XXXXXXXXXX , a complaint was also filed with the provincial Human Rights Commission where the employee worked. A second grievance was filed on XXXXXXXXXX on the basis the employer XXXXXXXXXX . In XXXXXXXXXX , a settlement was reached which provided a payment on the condition that the grievor is XXXXXXXXXX . The settlement payment was for loss of employment income and general damages. It appears that the general damages are for XXXXXXXXXX harassment.

Our Comments

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

A "retiring allowance" is defined in subsection 248(1) of the Income Tax 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." On the basis of the Supreme Court of Canada's in Nowegijick, 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 IT-337R4, Retiring Allowances, 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, hurt feelings, etc.

As noted in paragraph 12 of IT-337R4, only where general damages are received in respect of personal injuries sustained before or after the loss of employment (for example, in situations of harassment during employment or defamation after dismissal), or where a loss of employment involves a human rights violation and is settled out of court, will general damages be viewed as unrelated to the loss of employment and therefore non-taxable. In order to claim that damages received upon loss of employment are for personal injuries unrelated to the loss of employment, it must be clearly demonstrated that the damages received relate to events or actions separate from the loss of employment. In the case of damages received for a human rights violation, only a reasonable amount, determined by reference to the maximum amount that would be awarded under the particular human rights legislation and the evidence presented in the case, would qualify as non-taxable.

While we have not had the opportunity to examine the settlement agreement that was reached between the taxpayer and his/her employer, the information provided states a separate amount was paid for loss of employment and general damages. Based on the information you have provided, it appears that the amount received for general damages is a settlement for harassment received during employment and as such, would not be subject to tax. However, a definitive response could only be provided after a review of the settlement agreement.

We trust these comments will be of assistance.

Yours truly,

Guy Goulet CA, M.Fisc.
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch