April 24, 1991
Dear Madam:
Re: Pre-Judgement Interest Awards
As requested during your telephone conversation of April 23, 1991 (Dufour/Harding), this letter is to advise you of our general position with respect to the taxation of pre-judgement interest awarded as part of a retiring allowance paid as a consequence of a termination of employment.
It is our view that any interest paid in respect of an award for damages for a period of time up to the date of settlement is a non-taxable amount. However, any interest awarded in respect of employment income payable to the former employee is taxable as additional employment income. All interest earned in respect of a period after the date of settlement is taxable as interest income.
It should also be noted that a reimbursement of a former employee's legal expenses by an employer must be included in his income. However, an offsetting deduction for any costs incurred in collecting the award may be available as explained in the 1990 General Tax Return Guide a copy of which is enclosed.
The above comments are based upon our best understanding of the law as it applies generally and may or may not be applicable to the circumstances of a particular case. The comments do not form an advance income tax ruling and they are not binding on the Department.
Yours truly
for DirectorFinancial Industries divisionRulings Directorate