Principal Issues: [TaxInterpretations translation] Are certain amounts paid in settlement of union grievances taxable?
Position: General Comments
Reasons: Question of fact. We cannot give a definitive opinion due to the lack of information.
XXXXXXXXXX 2010-038970 Isabelle Landry
February 23, 2011
Dear Madam XXXXXXXXXX ,
Subject: Amounts paid in settlement of grievances
This is in response to your email of December 8, 2010, in which you asked us if certain amounts, such as compensation for renunciation of reinstatement of employment and waiver of notice, employment search costs or damages, paid by XXXXXXXXXX in settlement of union grievances are taxable.
Unless otherwise indicated, all statutory references in this document are to the provisions of the Income Tax Act (the "Act").
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5, Advance Income Tax Rulings, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, the 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 a review and analysis of all the facts, circumstances and documents specific to each situation. Consequently, given that your email only briefly describes a hypothetical situation, it is impossible for us to make a definitive determination of the tax treatment of those payments in this context. However, we can offer you the following general comments that we hope will be useful to you.
An amount received by a former employee from the employee’s former employer as a result of the termination of employment is generally taxable as income from that employment under subsection 5(1) or as a retiring allowance under subparagraph 56(1)(a)(ii). For example, compensation received for damages related to wages or other unpaid benefits (such as vacation) or compensation received upon the retroactive reinstatement of a dismissed employee will generally be considered taxable as income from employment.
The CRA's general position on the concept of a retiring allowance is set out in Interpretation Bulletin IT-337R4, Retiring Allowances (Consolidated) (available on the CRA Web site at http://www.cra-arc.gc.ca/E/pub/tp/it337r4-consolid/it337r4-consolid-e.pdf).
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 and must be included in computing the former employee's income under subparagraph 56(1)(a)(a)(ii). 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 order for damages received for personal injury to be considered unrelated to the loss of employment, it must be clearly demonstrated that the damages relate to actions or events distinct from the loss of employment. In determining whether this is the case, the severance pay to which the employee would reasonably have been entitled is taken into account.
We hope that our comments are of assistance.
Best regards,
Guy Goulet CA, M. Fisc.
for the Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.