| 922545 | |
| 24(1) | A.W. Larochelle |
| (613) 952-1361 |
Attention: 19(1)
October 23, 1992
Re: Wrongful Dismissal/Sexual Harassment Taxation of Settlement Proceeds
We are writing in reply to your letter of August 26, 1992 and subsequent correspondence with enclosures wherein you request an advance income tax ruling regarding the proper income tax treatment of the settlement proceeds received by a taxpayer on account of sexual harassment and loss of income.
As discussed in our recent telephone conversation, it is not possible to provide a ruling in this instance as such rulings are issued only for proposed transactions. It appears that in the case you have in mind the settlement has already been agreed upon and all the necessary documents signed by the parties involved. We are enclosing a copy of Information Circular I.C. 70-6R2 for your future reference. This circular deals in detail with the subject of advance income tax rulings and we would refer you to paragraph 6 thereof which states when a ruling can be provided. While we are unable to provide you with a ruling in this instance, we can however, express our general opinion as to the probable tax treatment of the issue you have raised.
24(1)
It is your view that, as the majority of the award was received for pain and suffering due to sexual harassment, the majority of the amount received should be excluded from income and that your client's legal fees should be deductible.
Our Comments:
It is our position, based on the information received, that the proceeds received under the settlement as damages is an amount received in respect of a loss of employment and, therefore, such amount would be taxable under subparagraph 56(1)(a)(ii) of the Income Tax Act (the Act) as a retiring allowance. This view is consistent with comments in paragraph 2 of Interpretation Bulletin IT-337R2 and the Tax Appeal Court decision in John James Young v. MNR (86 DTC 1567). The term "retiring allowance" is defined in subsection 248(1) of the Act. The definition states in part that a retiring allowance "means an amount received ... 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.
There is no provision in the Act that would permit the exclusion from income of that portion of the award received on account of sexual harassment. Furthermore, we understand that the settlement agreement in this instance did not provide any breakdown but simply states that the award was an all inclusive settlement.
While you did not mention whether or not the plaintiff in your situation received interest as part of the settlement, we are passing along our comments on this matter. It is the Department's position that pre-settlement interest received would be excluded from income. Usually, pre-settlement interest is computed on the settlement at an agreed or prescribed rate of interest, from the date the legal action is commenced up to the date of the settlement or award.
It should be noted that legal expenses paid by a taxpayer to collect or establish a right to salary or wages from an employer or former employer are deductible under paragraph 8(1)(b) of the Act. In the case of a retiring allowance (as defined in subsection 248(1) of the Act) related legal expenses are deductible within the limits imposed under paragraph 60(o.1) of the Act. In this respect, we would refer you to paragraphs 19 to 23 in Interpretation Bulletin IT-99R4.
In view of the above comments, and as mentioned in our telephone conversation of October 2, 1992, if you require further assistance, we suggest that you contact Mr. Doug Gaetz of our Halifax District Taxation office. He can be reached by telephone at (902) 426-4855.
We hope the above comments will be of assistance to you.
Yours truly,
P.D. Fuocofor DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch