| 19(1) | File No. 7-3911 |
| A. Humenuk | |
| (613) 957-2135 |
June 12, 1989
Re: Payments for Wrongful Dismissal
Your letter of April 11, 1989, concerning payments made to an employee upon termination of employment has been referred to us fro reply. You have asked for our administrative position in regard to the withholding requirements related to such payments. You have asked whether court awarded amounts such as pre-judgement interest, post-judgement interest, court costs, damages for mental distress, and exemplary or punitive damages are included in the definition of retiring allowance as defined in paragraph 248(1) of the Income Tax Act (the "Act") and consequently, whether the employer is required under subsection 153(1) of the Act to withhold on such amounts.
It is a question of fact as to whether or not any particular amount will form part of a retiring allowance as defined in subsection 248(1) of the Act. Therefore, we are unable to provide a definitive response which cover all situations. However, we would like to present the following general comments.
It is our view that pre-judgement interest and the reimbursement of legal costs which were essential to incur in respect of the conduct of legal costs which were essential to incur in respect of the conduct of an action in wrongful dismissal/breach of contract (loss of employment) are, to the extent that such costs were actually incurred by the recipient and are not otherwise deductible, not considered to form part of a retiring allowance. Such amounts are not included in the recipients income and are not subject to the withholding requirements of subsection 153(1) of the Act. However, we draw your attention to clause 4 of the April 27, 1989, Notice of Ways and Means Motion to Amend the Income Tax Act which proposes to allow a deduction for such legal expenses incurred after 1985.
In our view, post-judgement interest is included in income as interest income under paragraph 12(1)(c) of the Act. We confirm that there is no withholding requirements on such an amount.
It is a question of fact as to whether or not a particular award for damages, whether punitive, on account of mental distress, or any other kind, is in respect of a loss of office or employment. While we agree with your comment that amounts awarded specifically for the loss of employment will clearly fit the description of a retiring allowance in subsection 248(1) of the Act, it is our view that amounts paid for mental distress or as exemplary damages relating to the loss of employment also form part of the retiring allowance. The phrase "in respect of" which is used in the definition of retiring allowance was given the widest possible scope by the Supreme Court of Canada in the Queen v. Savage (83 DTC 5409) and Nowegijick v. the Queen (83 DTC 5041). To the extent that an amount can be considered to be in respect of a loss of office or employment and thus a retiring allowance, it is included in the recipient's income and the payer is required to withhold tax.
Where the amount does not form part of a retiring allowance, the nature of the payment must be determined in order to ascertain the extent to which the payer is required to withhold tax.
We trust our comments will be of assistance to you.
Yours truly,
for DirectorSmall Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch
c.c. Source Deductions Division