10 February 2005 External T.I. 2004-0104701E5 - Taxation of 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 amounts received as damages are a tax free receipt or a retiring allowance.

Position: Question of Fact.

Reasons: To the extent that the payment relates to a loss of income from employment, it will generally be a retiring allowance. Where the payment is an award of damages for a human rights violation, such payment is generally not taxable.

2004-010470
XXXXXXXXXX A. Seidel, CMA
(613) 957-2058
February 10, 2005

Dear XXXXXXXXXX:

Re: Awards of Damages

We are writing in response to your November 23, 2004 letter in which you request our views as to whether amounts awarded by a court are to be included in the recipient's income for income tax purposes.

You describe a situation in which an employee was on long-term disability at the time that the company for which the employee worked was sold. The new owners retained all of the current staff of the company except those on long-term disability. The employee filed a lawsuit against the new owners pursuant to the Canadian Human Rights Act and was awarded compensation for injury to dignity and compensation for lost disability benefits.

The particular circumstances in your letter on which you have asked for our views relates to a factual situation involving a specific taxpayer. As explained in our telephone conversation (Seidel/XXXXXXXXXX) and in Information Circular 70-6R5, Advance Income Tax Ruling ("IC 70-6R5"), the Canada Revenue Agency ("CRA") will only provide confirmation of the tax consequences of proposed transactions involving a specific taxpayer pursuant to a request for an advance income tax ruling. As requested, we offer the following general comments which may be of assistance.

The definition of "retiring allowance" in subsection 248(1) of the Income Tax Act (the "Act") includes 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. Pursuant to subparagraph 56(1)(a)(ii) of the Act, a taxpayer is required to include, in computing income for a taxation year, the amount of a retiring allowance received by the taxpayer in the year.

Interpretation Bulletin IT-337R4, Retiring Allowances ("IT-337R4") discusses what is meant by a retiring allowance and discusses the taxation of amounts that are considered to be a retiring allowance. In regards to your concerns, paragraphs 9 through 12 of IT-337R4 may be helpful.

To the extent that the compensation for "injury to dignity" is an amount described in paragraph 12 of IT-337R4, such an amount would not be included in the employee's income for income tax purposes. Where such an amount is more appropriately described in paragraph 11 of IT-337R4, such an amount would be considered to be a retiring allowance. Such an amount would therefore be included in the recipient's income pursuant to subparagraph 56(1)(a)(ii) of the Act.

Paragraph 6(1)(f) of the Act applies to include in employment income any benefits paid to an employee from a sickness, accident, disability or income maintenance insurance plan where the employer pays all or part of the premiums for the plan.

An amount received as compensation for lost long-term disability benefits will be included in the recipient's income pursuant to paragraph 6(1)(f) of the Act where such compensation is received in respect of an amount that was payable to the taxpayer on a periodic basis in respect of the loss of all or any part of the taxpayer's income from employment pursuant to a disability insurance plan. Otherwise, such compensation would be considered a retiring allowance, within paragraph (b) of the definition thereof in subsection 248(1) of the Act. Accordingly, such compensation would be included in the recipient's income pursuant to subparagraph 56(1)(a)(ii) of the Act.

IC 70-6R5 and IT-337R4 are available on our website at www.cra-arc.gc.ca.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch