29 January 2003 Internal T.I. 2002-0172217 - DAMAGES-HR VIOLATION

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Tax treatment of damages paid under a settlement agreement arising from loss of employment.

Position: General damages for violation of employee's human rights are not included in income. Aggravate damages for mental anguish caused by wrongful dismissal are taxable as a retiring allowance.

Reasons: 1. Available information, including settlement agreement, indicates that general damages were in respect of human rights violation. The provincial human rights legislation has no maximum award amount.

2. The facts indicate that the aggravated damages were paid for mental anguish caused by the loss of employment, and are therefore within the definition of retiring allowance.

						January 29, 2003

Mr. André Potvin			HEADQUARTERS
	Director				Wayne Antle, CGA
	Trust Accounts Division		(613) 957-2102

						2002-017221

Tax Treatment of Damages Received for Loss of Employment

This is further to your memorandum of November 6, 2002, concerning the tax implications of amounts received under a settlement agreement arising from a wrongful dismissal suit, and a complaint filed under the New Brunswick Human Rights Act.

You have summarized the facts as follows:

XXXXXXXXXX (the "employee") was an employee of XXXXXXXXXX (the "employer") for over XXXXXXXXXX years. During XXXXXXXXXX, the employee was suffering from workplace stress and depression. He consulted with his physician in XXXXXXXXXX, and was advised to take a XXXXXXXXXX leave of absence from his job. He stated that the employer terminated his employment after he requested the leave. The employee filed a lawsuit against the employer with the New Brunswick Court of Queens Bench alleging wrongful dismissal. He also filed a complaint with the New Brunswick Human Rights Commission arguing that he was discriminated against by the employer because of his mental disability. He subsequently reached a settlement agreement (the "agreement") with the employer, which provided for the following payments:

1. $XXXXXXXXXX as general damages for violation of the New Brunswick Human Rights Act,

2. $XXXXXXXXXX as aggravated damages,

3. $XXXXXXXXXX as a reimbursement of legal fees, and

4. $XXXXXXXXXX for XXXXXXXXXX lost wages as severance pay to be transferred to his RRSP under s. 60 of the Income Tax Act (the "Act").

You have asked us to consider the tax treatment of the general damages and aggravated damages paid under the agreement. Our comments on each amount paid under the agreement are as follows:

1. General Damages for Violation of Human Rights

"Retiring Allowance" is defined in subsection 248(1) of the 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". Accordingly, damages, even if they are awarded for hurt feelings, mental anguish, or similar reasons, may be a retiring allowance if the payments arise from an employee's loss of employment.

However, as noted in paragraph 9 of Interpretation Bulletin IT-337R3 Retiring Allowances, where the portion of the award or settlement amount that is in respect of damages can be shown to be related to a violation of the prevailing human rights legislation, then that portion will not be considered a retiring allowance, and will not be included in the employee's income. In order to determine whether some of the damages awarded for loss of employment relate to a human rights violation, there must first be clear evidence that an employee has lost his employment due to a contravention of existing human rights legislation. After establishing that a loss of employment is related to a human rights violation, then it is necessary to determine what portion of the damages reasonably relate to such a violation. The determination of what is reasonable is influenced by the maximum amount that can be awarded under the applicable human rights legislation, and the evidence presented in the case.

In our view, there is clear evidence that the employee was discriminated against by reason of his mental disability, in contravention of the New Brunswick Human Rights Act. He filed a complaint with the New Brunswick Human Rights Commission alleging such discrimination. Furthermore, his doctor has confirmed that he is suffering from clinical depression. Finally, the agreement between the employer and the employee acknowledges that the general damages were paid to the employee to compensate him for violation of his human rights.

With respect to the allocation of damages to the human rights violation, it is our view that it is reasonable to consider the general damages of $XXXXXXXXXX as relating to the contravention of the employee's human rights. The fact that the agreement provides for the payment of such damages is primae facie evidence that the damages are, in fact, paid to compensate the employee for the violation of his human rights. We do not feel that there is enough evidence to support treating the damages as being paid for a purpose other than that outlined in the agreement. Since the New Brunswick human rights legislation does not limit the amount that can be awarded, there is no reason to believe that the general damages paid under the agreement would be inconsistent with the New Brunswick law. Furthermore, we do not feel that a different conclusion can be drawn based on the human rights decisions presented in your referral, because these cases were heard in other jurisdictions, and each case represents a unique set of facts that is not entirely comparable to the present situation. Since the employee was dismissed after working for the employer for over XXXXXXXXXX years, and the employer acknowledges in the agreement that the employee was the subject of a human rights violation, it would be difficult to conclude that the general damages were not paid for the reasons set out in the agreement. Accordingly, we feel that the general damages of $XXXXXXXXXX should not be included in the employee's income.

2. Aggravated Damages

In our view, given that the agreement has authorized the payment of general damages for contravention of the employee's human rights, it is reasonable to conclude that the aggravated damages relate to the employee's dismissal. Based on the information provided to us, it appears that the aggravated damages of $XXXXXXXXXX were paid to compensate the employee for mental distress caused by his loss of employment. As noted above, damages paid for mental distress arising from a loss of employment fall within the meaning of "retiring allowance", as defined in subsection 248(1) of the Act. Therefore, these damages should be included in the employee's income pursuant to subparagraph 56(1)(a)(ii) of the Act.

3. Legal Fee Reimbursement

The amount awarded as a reimbursement of legal costs is excluded from the definition of "retiring allowance", but should be included in the employee's income pursuant to paragraph 56(1)(l.1) of the Act. The employee is entitled to deduct the related legal costs within the limits set out in subsection 60(o.1) of the Act. Please see paragraph 10 of IT-337R3 for more information in this regard.

4. Compensation for Lost Wages as Severance Pay

Whether an amount received by an employee, upon or after termination of employment, is income from employment, and therefore included in income pursuant to subsection 5(1) of the Act, or a retiring allowance that is included in income pursuant to subparagraph 56(1)(a)(ii) of the Act, is a question of fact that can only be determined after a review of the employment contract, other agreements and all of the other circumstances relevant to a particular situation. In our view, since the employer considers the amount to be severance pay, and there is no indication that the employee was entitled to lost wages under an employment contract, this amount should be included in the employee's income as a retiring allowance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Marc Vanasse, CA
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch