Principal Issues: [TaxInterpretations translation] Must the amount of compensation awarded by the Superior Court of Québec, including interest at the legal rate and additional compensation provided for in the Civil Code of Québec, be included in the income of those who receive it?
Position: Only amounts consisting of interest and additional compensation awarded since the date of the judgments will have to be included in the income of the claimants.
Reasons: The tax treatment of the compensation is determined according to the tax treatment of the amount that the compensation is intended to replace. Interest at the legal rate and additional compensation will be included in the income of claimants if these amounts represent interest within the meaning of paragraph 12(1)(c) of the Income Tax Act.
XXXXXXXXXX 2009-032275
February 16, 2010
Dear Sir,
Re: Tax treatment for a class action suit
This is further to your email of February 11, 2009, in which you sought our opinion on the tax treatment of compensation received under the Supreme Court of Canada's decision in XXXXXXXXXX
Specifically, on XXXXXXXXXX, the Superior Court allowed the class action brought by the plaintiffs against XXXXXXXXXX and ordered the payment of damages for XXXXXXXXXX.
You are therefore seeking confirmation from the Canada Revenue Agency ("CRA") of the tax treatment of the damages received by claimants. Your question also relates to the tax treatment of the interest and additional damages awarded on XXXXXXXXXX and accrued to that date and the interest and additional damages accrued since XXXXXXXXXX.
It should be noted that all that each claimant is entitled to here is the compensation (damages in addition to interest and additional damages) that will remain after deduction of the fees and the contribution to the Fonds d'aide aux recours collectifs.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Our Comments
The situation you indicated in your letter is an actual situation that concerns a specific taxpayer. As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is our practice not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. In addition, when determining whether a completed transaction has received appropriate tax treatment, that determination is first made by our Tax Services Offices following a review of all facts and documents, which is generally done in the course of an audit engagement. However, we can offer the following general comments that we hope you will find useful.
In order to determine the tax treatment of damages, the CRA is of the view that it is necessary to apply the surrogatum principle. As part of an analysis in this regard, Tsiaprailis v. Canada, [2005] 1 S.C.R. 113 identifies the issues that must be considered:
(1) What was the payment intended to replace?
(2) Would the replaced amount have been taxable in the recipient’s hands?
In your situation, the claimants received compensation for amounts that are personal in nature and could not be deducted in computing income for the purposes of the Act. It is therefore our position that the damages awarded by the Superior Court of Quebec and the Quebec Court of Appeal should not be reported on tax slips and should not be included in the claimants' income.
With respect to the interest and additional compensation awarded on XXXXXXXXXX and accrued to that date, the Canada Revenue Agency's position is based on the principle that the taxation of "prejudgment" interest should follow the tax treatment of the compensation to which it relates, unless such prejudgment interest is in fact interest by its nature. The courts generally define interest as the "return, consideration or compensation for the use or holding by one person of money that belongs to or is due to another person.” Whether an amount paid pursuant to a court order or an out-of-court settlement constitutes interest income is, of course, a question of fact.
In this case, we are of the view that only interest at the legal rate and the additional compensation provided for in the Civil Code of Quebec accrued since the date of the judgments of the Superior Court of Quebec must be included in the calculation of the plaintiffs' income under paragraph 12(1)(c). These amounts must be reported on a T5 slip for the year they are received or receivable.
We hope you find the above comments of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.