Revenue Canada Taxation Head Office
D.Y. Dalphy (613) 957-2134
August 13, 1986
Dear: XXXX
Re: Interest Components of Damage Awards
This is in reply to your letter of February 3, 1986, regarding amounts paid by XXXX in respect of your clients, XXXX. We apologize for the delay in responding.
Paragraph 81(1)(g.1) of the Income Tax Act (the "Act"), which is applicable to the 1984 and subsequent taxation years, provides that the following amounts shall not be included in computing the income of a taxpayer for a taxation year:
"the income for the year from any property acquired by or on behalf of a person as an award of, or pursuant to an action for, damages in respect of physical or mental injury to that person, or from any property substituted therefore and any taxable capital gain for the year from the disposition of any such property, (i) where the income was income from property, if the income was earned in respect of a period before the end of the taxation year in which the person attained the age of 21 years, and (ii) in any other case, if the person was less than 21 years of age during any part of the year."
That is, this recently amended paragraph of the Act ensures that interest (pre- and post- judgment) and other property income which has accrued in respect of the exempt period is exempt from tax and extends the exempt period to the end of the taxation year in which the injured person becomes 21 years old.
We enclose copies of Interpretation Bulletins IT-396R and IT-365R (and the Special Release dated May 25, 1984) as well as a Press Release dated April 26, 1985, for your reference. Although, in situations where paragraph 81(1)(g.1) of the Act does not apply, we are of the opinion that both pre- and post- judgment interest would be subject to taxation when received or receivable pursuant to paragraph 12(1)(c) of the Act (we refer you to paragraphs 1 to 6 of Interpretation Bulletin IT-396R ), the Department's present position with regard to the interest associated with damage awards that relates to the period prior to the court order (pre-judgment interest) is described in the aforementioned Press Release. Accordingly, amounts in respect of pre-judgment interest would not be included in income if the damage award was received in 1984 and, this position has been extended to awards received in 1985.
We hope these comments and materials will be of assistance to you.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch Enclosures