After a unionized employee filed a grievance for wrongful dismissal, the employer will pay the employee a lump sum so that the latter can make a contribution to a registered pension plan in order to buy back past years of service, as a result of which the employee can retire without penalty.
Before turning to the treatment of the contribution, CRA stated:
[G]eneral damages received by an employee to compensate the employee for events occurring during the employee’s employment will generally be considered unrelated to the loss of employment and therefore not to be taxable. Since such actions or events are distinct from the loss of employment, the damages are instead intended to compensate the employee for personal injury sustained before the loss of employment rather than to compensate the employee for the loss of employment.
Similarly, damages awarded as a result of a human rights violation may be considered unrelated to the loss of employment, although often loss of employment results from a complaint of human rights violation. An amount that a human rights tribunal awards to a taxpayer as general damages does not normally have to be included in income.