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:
Taxation of Settlement Proceeds to Recipient
Position TAKEN:
Question of Fact. The receipt of damages/settlement will be ordinary income if it compensates for the loss of an amount that would have been income, be it from business, property or employment sources. If the facts of the case indicate that an amount was received as compensation for loss of, or damage to, a capital asset then the amount will be a capital receipt.
Reasons FOR POSITION TAKEN:
Jurisprudence. A payment in settlement of a damages claim to avoid or terminate litigation will generally be accorded similar treatment as damages for tax purposes even though there was no admission of any wrongdoing. In reviewing the tax repercussions of certain receipts the courts have stated "With respect to purpose, the essential question is to determine what the compensation - whether paid pursuant to a contract, a court award of damages, or otherwise - is intended to replace.... it appears to me that whatever the source of the legal right to the compensation, be it the contract or the law of damages, the substantive issue is: what is this amount intended to replace?"
933572
XXXXXXXXXX D. Zion
June 2, 1994
Dear XXXXXXXXXX:
Re: Taxation of Settlement Proceeds to Recipient
We are writing in response to your correspondence of December 7, 1993, wherein you requested clarification of the Department's position regarding the taxability of out of court settlements received by individuals. These settlements relate to compensation for the loss of property or income due to negligence or breach of fiduciary duty. We apologize for the delay in replying.
You have asked if the Department will apply similar principles as outlined in paragraph 8 of IT-365R2 Damages, Settlements and Similar Receipts to settlement payments for the loss of income from investment property and/or a decrease in the value of the investment property. This paragraph outlines the general treatment of receipts in respect of non-performance of business contracts.
As the situation briefly outlined in your correspondence involves completed transactions and the main issue is dependent on the facts of a specific case, the tax status of this settlement should be discussed with an audit official of your local district taxation office. We are therefore not in a position to give you a definitive response. We will however, provide the following general comments which may be of assistance to you.
A payment in settlement of a damages claim to avoid or terminate litigation will generally be accorded similar treatment as damages for tax purposes even though there was no admission of any wrongdoing. In reviewing the tax repercussions of certain receipts the courts have stated "With respect to purpose, the essential question is to determine what the compensation - whether paid pursuant to a contract, a court award of damages, or otherwise - is intended to replace.... it appears to me that whatever the source of the legal right to the compensation, be it the contract or the law of damages, the substantive issue is: what is this amount intended to replace?" (London and Thames Haven Oil Wharves Ltd. v. Attwooll (1967) 2 All. E.R. 124 (C.A.); followed in H.M. v. Manley (1985) 85 DTC 5150 (F.C.A.)).
Thus, in our view, the receipt of damages/settlement will be ordinary income if it compensates for the loss of an amount that would have been income, be it from business, property or employment sources. If the facts of the case indicate that an amount was received as compensation for loss of, or damage to, a capital asset then the amount will be a capital receipt. This underlying premise is reflected in paragraph 8 of IT-365R2 to which you have referred as well as paragraph 9.
We trust our comments will be of assistance to you.
Yours truly,
J.A. Szeszycki
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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