Principal Issues: [TaxInterpretations translation] What tax treatment should be given to the following amounts received by the Taxpayer in a settlement with her employer:
- allowance for loss of vacation credits.
- reimbursement of costs for psychotherapy and medication that are not covered by the employer's health care plan.
- compensation for pain and suffering under section 53(2)(e) of the Canadian Human Rights Act.
Position:
- taxable.
- taxable.
- non-taxable.
Reasons:
- Employment income - subsection 5(1) or section 6 of the Act.
- Employment income - subsection 5(1) or section 6 of the Act.
- General damages received as a result of a violation of human rights that can be considered unrelated to the loss of employment-IT-337R4 paragraph 12.
XXXXXXXXXX Danielle Bouffard
2004-010433
Le 17 février 2005
Dear Sir,
Subject: Request for technical interpretation Compensation and other payments
This is further to your email of November 22, 2004 requesting our opinion on the tax treatment of various amounts paid by XXXXXXXXXX ("the employer") to an employee (the “taxpayer"). We have taken into account the additional information provided on January 10, 18, 19 and 27, 2005 and February 15, 2005.
The facts are as follows:
1) The taxpayer lodged a complaint because of certain actions of her employer which led her to take sick leave. She was off work on disability for XXXXXXXXXX.
2) A Memorandum of Understanding between the taxpayer and the employer was signed in XXXXXXXXXX according the taxpayer the following payments:
a) $ XXXXXXXXXX as an allowance for loss of vacation credits during the period of XXXXXXXXXX;
b) $XXXXXXXXXX as reimbursement for psychotherapy and medication costs incurred by XXXXXXXXXX that were not covered by her employer's health care plan;
c) $XXXXXXXXXX as compensation for pain and suffering under section 53(2)(e) of the Canadian Human Rights Act.
3) The taxpayer agreed that the settlement represented a final settlement with her employer in respect of all matters relating to her employment, including the incidents alleged in her complaint.
4) The taxpayer left the federal public service and retired in XXXXXXXXXX.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that 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. However, we can offer the following general comments. These comments may not, however, apply to your particular situation in certain circumstances.
In general, compensation paid to an individual by the individual’s employer or former employer as damages may be employment income taxable pursuant to subsection 5(1) of the Income Tax Act (the "Act"), a retiring allowance taxable under subparagraph 56(1)(a)(ii), non-taxable damages, or a combination of these.
The term "retiring allowance" is defined in subsection 248(1). That definition provides that the term includes an amount received in respect of the taxpayer's loss of an office or employment, whether or not received as damages or pursuant to an order or judgment of a competent tribunal.
As noted in paragraph 5 of Interpretation Bulletin IT-337R4, Retiring Allowances, in this context, the words "in respect of" have been held by the Courts to imply a connection between the loss of employment and the subsequent receipt, where the primary purpose of the receipt was compensation for the loss of employment. Two questions set out by the Courts to determine whether a connection exists for purposes of a retiring allowance are as follows:
1 – But for the loss of employment would the amount have been received? and,
2 – Was the purpose of the payment to compensate a loss of employment?
Only if the answer to the first question is "no" and the answer to the second question is "yes", will the amount received be considered a retiring allowance.
According to this Bulletin, termination of employment for any reason is considered retirement or loss of employment.
Furthermore, paragraph 12 of IT-337R4 states:
…[G]eneral 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. If a human rights tribunal awards a taxpayer an amount for general damages, the amount is normally not required to be included in income. 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. Any excess will be taxed as a retiring allowance.
In the context of this request, the taxpayer received $XXXXXXXXXX from her employer as an allowance for loss of vacation credits. As noted in paragraph 15 of Interpretation Bulletin IT-365R2, where a taxpayer receives an amount pursuant to the terms of an employment contract, the amount is to be included in computing the taxpayer's income under subsection 5(1) or section 6, whichever may be applicable, as income from an office or employment, whether or not it is received on termination of the employment. Such an amount would include, for example, salary, wages, accrued vacation pay, and an amount paid in lieu of notice of termination. We are of the view that the $XXXXXXXXXX would constitute employment income for the taxpayer in the year it was received.
Furthermore, taking into account the information provided, we are of the view that the amount of $XXXXXXXXXX received by the taxpayer as reimbursement for psychotherapy and medication would also be taxable as employment income for the taxpayer in the year received.
Finally, the taxpayer was awarded $XXXXXXXXXX for pain and suffering under paragraph 53(2)(e) of the Canadian Human Rights Act. As described in paragraph 12 of IT-337R4, we are of the view that this compensation falls within the scope of general damages received as a result of a human rights violation and can be considered unrelated to the taxpayer's loss of employment. Consequently, the amount of $XXXXXXXXXX should not be included in the taxpayer's income.
The tax implications described herein are based on the facts provided by the employer. A change in the facts presented could alter our comments.
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
Best regards,
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch