Principal Issues: [TaxInterpretations translation] Is reinstatement compensation paid by an employer to an employee taxable?
Position: We are of the view that compensation for renouncing rights of reinstatement is generally taxable as a retiring allowance pursuant to subparagraph 56(1)(a)(ii)
Reasons: The definition of "retiring allowance" in subsection 248(1) includes an amount received by an employee following the loss of the employee’s employment.
XXXXXXXXXX 2011-040606 I. Landry, M.Fisc. August 11, 2011
Dear Ms. XXXXXXXXXX,
Subject: Damages received following the loss of a job
This is in response to your letter of April 30, 2010 in which you asked us whether compensation for renouncing rights of reinstatement received in settlement of union grievances is taxable.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. The determination of the nature of a compensation is a question of fact that requires an examination and analysis of all the facts, circumstances and documents specific to each situation.
However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Generally, an amount received by a former employee from the former employer as a result of the termination of the employee’s employment is taxable as income from that employment by virtue of subsection 5(1) or as a retiring allowance by virtue of subparagraph 56(1)(a)(ii). For example, compensation received for damages related to wages or other unpaid benefits (such as for vacations) or compensation received upon retroactive reinstatement of a terminated employee will generally be considered taxable as income earned from a job.
However, compensation received by a former employee from the employee’s former employer for damages as a result of wrongful dismissal will be considered as a retiring allowance and will be required to be included in computing the former employee's income under subparagraph 56(1)(a)(ii). That would generally be the case where compensation is for loss of earnings, renunciation of the reinstatement of employment and other benefits including the costs of seeking new employment, where there is a connection between the loss of employment and such payments.
Consequently, compensation received for renouncing rights of reinstatement received in settlement of union grievances will generally be considered to be a retiring allowance and will be required to be included in the computation of the former employee's income by virtue of subparagraph 56(1)(a)(ii).
For more information on the concept of retiring allowance, see Interpretation Bulletin IT-337R4, Retiring Allowances (Consolidated) (available on the CRA's Web site at http: / /www.cra-arc.gc.ca/E/pub/tp/it337r4-consolid/it337r4-consolid-e.pdf).
Best regards,
Guy Goulet CA, M. Fisc.
for the Director
Ontario Corporate Income Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch