Principal Issues: Whether general damages paid by an employer for an alleged human rights violation are taxable.
Position: A portion of the settlement is likely non-taxable, however, the determination of the amount is a question of fact..
Reasons: Where a complaint involving a human rights violation by an employer is settled out of court, a reasonable amount in respect of general damages would not be included in the employee's income from employment. Any amount in excess of a reasonable amount would be included in the employee's income under subsections 5(1) or 6(3). Determination of a reasonable amount is influenced by the maximum amount that can be awarded under the applicable human rights legislation and the evidence presented in the case. Accordingly, a review of comparable cases heard at the XXXXXXXXXX is required.
XXXXXXXXXX 2008-027372 S. Fron May 8, 2009
XXXXXXXXXX :
Re: Taxation of settlement
This is in response to a letter dated April 1, 2008 from XXXXXXXXXX , written on your behalf, concerning the statutory deductions applicable to a settlement negotiated between you and XXXXXXXXXX , "the employer". We also acknowledge discussions with and further information submitted by XXXXXXXXXX concerning your situation.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance. As discussed in paragraph 22 of IC 70-6R5, our comments are not binding. You may access the IC on our website, www.cra-arc.gc.ca.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
XXXXXXXXXX letter indicated that you filed a grievance against the employer alleging that the employer failed to accommodate your disability. The grievance was heard before an arbitrator who assisted the parties in achieving a resolution to the grievance before all of the evidence was heard. The arbitrator referred to the resolution as an arbitration award, the relevant terms of which included:
1. The settlement was a compromised resolution of a disputed claim and was made without any admission of liability on the part of the employer, the Union or you.
2. The sum of $XXXXXXXXXX to be paid to you was "XXXXXXXXXX ..."
3. The Union withdrew the grievance and you agreed that you would not file any further claim, including a complaint under the XXXXXXXXXX
You received long term disability payments during your time off work and have been accommodated in a new job with the same employer. The settlement amount was to be directed partially to a registered retirement savings plan ("RRSP") in your name and partially to you personally. Based on subsequent discussions with XXXXXXXXXX , we understand that the employer has paid the settlement amount.
Our Comments
Pursuant to subsection 5(1) of the Act, a taxpayer's income for a taxation year from an office or employment is the salary, wages and other remuneration received by the taxpayer in the year.
Paragraph 9 of Interpretation Bulletin IT-337R4, Retiring Allowances ("IT-337R4"), states, "generally, compensation received by an individual from the individual's employer or former employer on account of damages may be employment income, a retiring allowance, non-taxable damages, or a combination thereof." Justice Mogan of the Tax Court of Canada made the following comments on this issue in the case of Catherine Dumas v. Her Majesty the Queen, 2000 DTC 2603 (TCC):
"In income tax law, there is nothing magic about an amount recovered by a plaintiff in civil litigation whether it be the result of a favourable judgment or a negotiated settlement. The amount recovered is compensatory in nature. That alone will not determine its character for tax purposes as being income or capital or something else. The real question is to determine why the compensatory amount was paid. The answer is often found in the pleadings of the plaintiff and defendant in the civil litigation."
As indicated above, a resolution of this issue requires a review of all the relevant facts including the terms of settlement and the nature of the claim, to determine why the amount was paid.
Based on your Local's submission and the original grievance form filed on your behalf, it appears that the settlement relates to a human rights violation and the employer's alleged failure to accommodate you in a new position.
With respect to damages received for alleged human rights violations, paragraph 12 of IT-337R4 states that "general damages relating to human rights violations can be considered unrelated to a loss of employment, despite the fact that the loss of employment is often a direct result of a human rights violations complaint", and that "when a loss of employment involves a human rights violation and is settled out of court, a reasonable amount in respect of general damages can be excluded from income. The determination of what is reasonable is influenced by the maximum amount that can be awarded under the applicable human rights legislation and the evidence presented in the case."
Although these comments relate to a situation involving a loss of employment, it is our view that where a complaint involving a human rights violation by an employer is settled out of court, a reasonable amount in respect of general damages would not be included in the employee's income from employment. Any amount in excess of such reasonable amount would, however, be included in the employee's income from employment under subsection 5(1) of the Act.
XXXXXXXXXX
Since most awards XXXXXXXXXX are under $10,000, we would expect that only a portion of the settlement that you received would be considered a reasonable amount in respect of general damages and therefore non-taxable. The determination of the tax-free amount is a question of fact. To determine this amount you should review the XXXXXXXXXX decisions available on the internet to find the most comparable cases to yours. Once you have compiled this information you may wish to provide it to the XXXXXXXXXX Tax Services Office so that they can review your situation.
Your employer was required to deduct Canada Pension Plan contributions, Employment Insurance premiums and income tax from the taxable amount of the settlement.
Finally, with respect to any amount directly transferred to your RRSP, it appears that the amount received would not be considered a "retiring allowance" as discussed in IT-337R4. In general, a retiring allowance must result from retirement or a loss of employment. Paragraph 8 of IT-337R4 describes several situations which would not be considered to be a "loss of employment", including a transfer from one office or position to another with the same employer or termination of employment with an employer followed by re-employment with the employer. The amount you received would not be eligible for a deduction under paragraph 60(j.1) of the Act. However, subject to your available RRSP deduction limit, the amount directly transferred to your RRSP could be deductible as a regular or spousal RRSP contribution pursuant to subsection 146(5) or (5.1) of the Act, respectively.
We trust our comments will be of assistance to you.
Lita Krantz
Acting Director
Income Tax Rulings Directorate
Ontario Corporate Tax Division