Principal Issues: CRA requirements by a payer and recipient in relation to court awarded damages or payments that are made to settle or avoid litigation. Status of receipts indicated in paragraph 10 of IT-365-R2.
Position: Not Applicable
Reasons: General information request regarding tax treatment of court awarded damages and out of court settlements. No position requested.
Richard Bergeron National Claims Coordinator Correctional Services of Canada 2005-012905 340 Laurier Avenue West Tim Fitzgerald, CGA Ottawa ON K1A 0P9 (519)973-7999ext. 6509
November 23, 2005
Dear Mr. Bergeron:
Re: Tax Status of Claim Settlements
This is further to your letter of May 2, 2005 requesting direction from the Canada Revenue Agency concerning the income tax requirements of the payer and the recipient in relation to payments for court awarded settlements or payments made to settle or avoid litigation.
Our Comments:
Your general question for direction concerning the income tax requirements of the payer and the recipient in relation to court awarded settlements is a broad one and does not lend itself to specific answers. The tax status of a given compensation payment or receipt arising from court awarded damages or an out-of-court settlement and the like, can only be determined in the context of the particular facts and circumstances surrounding each specific case. Unfortunately, we cannot opine on the tax treatment as there are insufficient facts. For example, we would require detailed description of the facts that led to the pay-out, copies of court orders, copies of out-of-court settlements, statements of liability, copies of insurance claims and insurance settlements, copies of reports to the police, other governmental departments etc.
Information bulletins issued by the Canada Revenue Agency could provide guidance. For example, IT-365R2 Damages, Settlements and Similar Receipts (which you refer in your letter) is one such information bulletin. IT-Bulletin 467R2 - Damages, Settlements and Similar payments (which approaches the subject from the payer's perspective) is another. The relevance of each interpretation bulletin depends on the specific facts of each payment. Depending on other issues you encounter, you may also find Information bulletin IT-202R2 "Employees' or Worker's Compensation "useful. This information bulletin deals with the tax treatment of an award of compensation, as adjudicated by a compensation board or commission in Canada, which is received as a result of a worker having suffered injury, disability or death while performing the duties of employment. You may also want to refer to IT-337R4 "Retiring Allowances". Paragraphs 9 - 12 for instance, deal with the tax treatment of various types of receipts from an individual's employer or former employer in respect of a loss of office or employment including situations involving specific and/or general damages.
We would be pleased to assist you more fully and suggest that you contact your Tax Services Office or us with the full details as suggested above. Our contact details are available on the Canada Revenue Agency website located at http://www.cra-arc.gc.ca/menu-e.html.
Yours truly,
S. Chua LLB(Hons), FCA
Section Manager
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch