Is compensation received for renunciation of reinstatement of employment and waiver of notice, employment search costs or damages, that is paid in settlement of union grievances, taxable? CRA responded:
Generally, compensation received by a former employee from the employee’s former employer for damages resulting from wrongful dismissal will be considered to be a retiring allowance … . That would be the case, for example, where compensation is for loss of wages, renunciation of reinstatement of employment and waiver or other benefits including the costs incurred in seeking new employment, and there is a link between the loss of employment and those payments.
However, where an individual has suffered personal injury before or after loss of employment (for example, if the employee was harassed while employed or defamed after being dismissed), it may be considered that the general damages received for that injury are unrelated to the loss of employment and, therefore, are not taxable. … In determining whether this is the case, the severance pay to which the employee would reasonably have been entitled is taken into account.