23 February 1989 Income Tax Severed Letter 5-7251 -  

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.

J.D. Jones 957-2104

Feb 23 1989

Dear Sirs:

Re: Taxation of Settlement for Wrongful Dismissal

This is in reply to your correspondence received on December 21, 1988, and further to our telephone conversation of December 22, 1988 wherein you requested a technical interpretation of the applicable provisions of the Income Tax Act (the "Act") as it relates to the above subject.

We comment at the outset that our responses to your questions will be general in nature as the specifics of the situation are not available to us.

An amount received from an employer after "retirement" is taxable either as employment income by virtue of subsection 6(3) of the Act or as a retiring allowance by virtue of subparagraph 56(1)(a)(ii) of the Act. If the amount is in satisfaction of an obligation by the employer to the employee arising as a result of his employment, the amount is usually considered employment income unless it can be considered a retiring allowance. If the obligation is in respect of long service or loss of office or employment, the amount likely would represent a "retiring allowance" as that term is defined under subsection 248(1) of the Act.

On the assumption that the amount received by your client is considered a retiring allowance within the meaning of subsection 248(1) of the Act, we respond to your queries in the following manner.

In our view, although all reimbursements would not be excluded from the definition of retiring allowance as that term is defined in subsection 248(1) of the Act, amounts provided to a taxpayer or paid on behalf of the taxpayer to the taxpayer's solicitors as a reimbursement for costs which were essential to incur in respect of and directly related to the conduct of an action in wrongful dismissal/breach of contract (loss of employment) are, to the extent that such costs were actually incurred by the taxpayer and are not otherwise deductible, not considered to form part of a retiring allowance. Withholding tax will not be required on the payment of such reimbursements.

The amount of a retiring allowance which may be transferred to an R.R.S.P. is contained in paragraph 12 of IT-337R2 .

In order to avoid income tax being withheld at source on that portion of the retiring allowance your client wishes to transfer to an R.R.S.P., form TD2 "Tax Deduction Waiver in respect of Funds to be Transferred" is required to be completed (see Information Circular IC 79-8R2).

We trust our comments will be of assistance.

Yours truly,

ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR

P.D.FUOCO

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch