29 April 1988 Income Tax Severed Letter 5-5861 - [Source Deduction Obligations and Retiring Allowances]

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.

R. B. Day (613) 957-2136

APR 29 1988

Re: Source Deduction Obligations and Retiring Allowances

We are writing in reply to your letter of March 30, 1988, wherein you requested our views regarding the interpretation of the source deduction provisions in the Income Tax Act (the "Act") as they relate to payments of retiring allowances as defined in subsection 248(1) of the Act. In particular, you are concerned with the application of those provisions in circumstances in which the payment to the former employee includes prejudgment and postjudgment interest, either as part of an agreed settlement or a court awarded 4 judgment following a loss of office or employment by an employee.

As we understand it, in connection with the settlement of a wrongful dismissal claim or action, or as a result of the decision of a court in such an action, an employer may agree to, or be required to, pay to the Plaintiff employee an amount on account of interest. This amount for the interest is usually calculated in accordance with the applicable rules of court and runs from the date of the loss of office or employment of the employee to the date of settlement or judgment. In the case of wrongful dismissal actions which proceed to court, the former employer often pays an additional amount for interest from the date of judgment to the date of actual payment to the employee.

In some circumstances, such interest payments may be paid by the employer by separate cheque directly to the employee, along with the settlement or damage payment. In other cases, the interest may be included in a lump sum amount paid by the employer covering the settlement or damages awarded, plus interest.

In your view, such payments on account of interest do not represent a "retiring allowance" within the meaning of subsection 248(1) of the Act, since it does not represent an amount received in respect of a loss of an office or employment of a taxpayer, but rather a payment of interest on an award of damages. As such, the amount of the interest should not be included in the amount of the retiring allowance and, therefore, should not be subject to withholding at source.

We will respond to the questions posed in your letter, in the order in which they appear.

(1) It is our opinion that neither the amount received as prejudgment interest nor the amount received as postjudgment interest would form part of a "retiring allowance" as defined in subsection 248(1) of the Act.

We have taken the position that recipients of damage awards are not required to include in income, for income tax purposes, the interest associated with the award that relates to the period prior to the court order or settlement. In this regard, interest would normally be computed on the principal amount of the settlement at an agreed or prescribed rate of interest from the date the legal action was commenced up to the date of the settlement or award.

This administrative position was first announced in a press release dated April 26, 1985, and related to personal injury and personal damages awards received in 1984. This position was subsequently extended to similar awards received in 1985 and subsequent taxation years and was also extended to include prejudgment interest on awards for wrongful dismissal.

There is no present intention to require that such interest be included in income until the Income Tax Act is amended to deal specifically with this matter.

With respect to postjudgment interest, it is our opinion that the amounts received should be included in the recipient's income, in the year of receipt, under paragraph 12(1)(c) of the Act.

(2) The Department draws no distinction between interest received on account of a court judgment as opposed to an out-of-court settlement.

(3) Since our response to the first question was in the negative, no amount of any interest received may be transferred to a Registered Retirement Savings Plan.

(4) As discussed in (1) above, any postjudgment interest received by the former employee must be reported in the year of receipt.

We trust the above information will be of assistance.

Yours truly,

ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR ROBERT H. JOYCE

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