Principal Issues: [TaxInterpretations translation] (1) Is the amount received by the taxpayer from the former employer as compensation for loss of wages within the meaning of paragraph 53(2)(c) of the Canadian Human Rights Act a taxable retiring allowance within the meaning of subparagraph 56(1)(a)(ii) of the Income Tax Act?
(2) What is the tax treatment of an amount received by a taxpayer from the former employer as compensation for pain and suffering within the meaning of paragraph 53(2)(e) of the Canadian Human Rights Act?
Position: (1) Yes.
(2) This amount is not taxable.
Reasons: (1) Amounts paid within the meaning of paragraph 53(2)(c) of the Canadian Human Rights Act are defined as amounts paid to compensate for lost wages. In light of the conditions set out in Interpretation Bulletin IT-337R4 and in accordance with subsection 248(1), they are a retiring allowance.
(2) According to the Canada Revenue Agency's position, compensation for pain and suffering is not taxable.
November 17, 2008
XXXXXXXXXX Tax Services Office Headquarters Income Tax Rulings Directorate Attention: XXXXXXXXXX Nancy Turgeon, CGA
2008-029962
Severance allowance
This is in response to your return note of October 31, 2008 in which you asked us for an interpretation of the tax treatment of a severance allowance received by a taxpayer.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you stated that the taxpayer was dismissed in XXXXXXXXXX. As a result of an out-of-court settlement with the former employer, the taxpayer received in XXXXXXXXXX an amount of $XXXXXXXXXX as compensation for lost wages within the meaning of paragraph 53(2)(c) of the Canadian Human Rights Act (the "Canadian Act") and an amount of $XXXXXXXXXX as compensation for pain and suffering within the meaning of paragraph 53(2)(e) of the Canadian Act.
Our Comments
In general, compensation paid to an individual by the individual’s employer or former employer as damages may be employment income, a retiring allowance, non-taxable damages or a combination of those items. Determining the nature of such compensation is a question of fact that requires an examination of all the facts and documents specific to each case.
Special damages, including the amount of $XXXXXXXXXX received by the taxpayer in this case, may be taxable as employment income if the employee remains employed or is reinstated.
Alternatively, it is possible that these damages may constitute a retiring allowance depending on the answer to the following two questions:
- But for the loss of employment, would the individual have received the payment?
- Was the purpose of the payment to compensate the individual for the loss of employment?
Subsection 248(1) provides a definition of "retiring allowance". According to this definition, a retiring allowance includes, inter alia, an amount received by a taxpayer in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal.
Thus, where the answer to the first question above is "no" and the answer to the second question is "yes", the Canada Revenue Agency (the "CRA") is generally of the view that the payment represents a retiring allowance. In this case, the first clause of the settlement agreement entered into pursuant to the Canadian Act clearly states that the amount of $XXXXXXXXXX is paid as compensation for lost wages. We are therefore of the view that it should be taxed as a retiring allowance.
Furthermore, an amount received as general damages, particularly as compensation for loss of self-esteem, humiliation, pain and suffering and insults, may be a retiring allowance if the payment results from the taxpayer's loss of an office or employment. If the amount is unrelated to the loss of employment, it is generally not taxable.
Similarly, an amount awarded by a human rights tribunal to a taxpayer as general damages is not normally required to be included in income. Where a loss of employment is related to a human rights violation and there is a settlement, a reasonable amount in respect of general damages may be excluded from income. The question of what is reasonable depends, inter alia, on the maximum amount that can be awarded under the applicable human rights legislation and the evidence presented in the case.
In this case, the second clause of the settlement report indicates that the amount of $XXXXXXXXXX was paid as compensation for pain and suffering within the meaning of paragraph 53(2)(e) of the Canadian Act. This amount, so defined and being below the maximum amount that may be awarded under the legislative provisions of the Canadian Act, must therefore be excluded from the taxpayer's income.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.
c.c. Carmen Malette
Office of the Deputy Commissioner, Ministerial Correspondence
Assessment and Benefit Services Branch