25 September 1998 External T.I. 9816075 - WITHHOLDING ON WRONGFUL DISMISSAL AWARDS

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 request for the withholding requirements on various aspects of wrongful dismissal awards.

Position: Withholding required on all aspects of a wrongful dismissal award except post and pre-judgement interest and legal expense reimbursements.

Reasons: A wrongful dismissal award falls within the definition of “retiring allowance”. Recent review of pre and post judgement interest is complete and the status quo is to be maintained. The reimbursement of mitigation expenses (e.g., expense of former employee to find another job) is related to the loss of employment and seems to be another factor in establishing the total award to be paid by the employer.

XXXXXXXXXX 981607
J. E. Grisé
Attention: XXXXXXXXXX

September 25, 1998

Dear Sirs:

Re: Withholding on Wrongful Dismissal Awards

This is in reply to your letter of June 17, 1998 requesting an update on withholding requirements for wrongful dismissal awards.

We confirm that the withholding requirements set out in our letter of July 17, 1992, written by Mr. J. A. Szeszycki remain accurate.

Your interpretation of the last paragraph of the July 17, 1992 letter is accurate in that an employee who has received reimbursement of legal costs to establish a right to a retiring allowance (e.g., a wrongful dismissal award) should report such legal costs as income, under paragraph 56(1)(l.1) of the Act, on his or her return and should claim the legal costs to the extent permitted under paragraph 60(o.1) of the Income Tax Act. We confirm that no income tax need be withheld from the amount the employer pays for the reimbursement of legal expenses paid to collect or establish a right to a retiring allowance.

In our view, 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. Such payments would be subject to withholding under paragraph 153(1)(c) of the Act. Similarly, withholding would be required for the reimbursement of mitigation expenses (e.g., the reimbursement of a former employee’s costs of finding employment in order to mitigate the damages as a result of being dismissed) obtained as part of a wrongful dismissal settlement. Such a reimbursement would be in respect of a loss of an office or employment and would fall within the definition of “retiring allowance” in subsection 248(1) of the Income Tax Act.

We hope our comments are helpful.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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