DATE August 20, 1986
Enquiries and Taxpayer Assistance Division
FROM - Small Business and General Division
A. Jane 957-2126
Mrs. P. McNally Chief Taxpayer Assistance Section
Your File: HAV 5804-2
RE Wrongful Dismissal
This is in reply to your memorandum and attachments of June 10, 1986, concerning the Department's position in regard to certain claims for damages made by an employee against his former employer including wrongful dismissal.
We understand a proposal has been made to settle what is said to be four separate claims listed below:
(a) breach of a contract of employment, (b) the tort of wrongful dismissal, (c) loss of reputation, and (d) mental distress.
While each of these claims was brought by one taxpayer against his former employer, the taxpayer's solicitor says the claims in (c) and (d) are independent and unrelated to the claims in (a) and (b). The claims in (c) and (d) relate to a separate incident unrelated to the employment or termination of that employment. According to the solicitor's representations, these two claims arose as a result of public statements or remarks of the employer. The remarks did not mention the taxpayer by name, but facilitated an unfavourable impression of him in the community causing damage to his reputation and mental distress. It is said that these claims are similar to the tort of defamation and that they arose prior to the loss of office or employment. The taxpayer's claims for loss of reputation and mental distress are said by the solicitor to have nothing whatever to do with the claims for breach of contract of employment and wrongful dismissal.
You have advised the taxpayer's solicitor by way of general comment that the definition of retiring allowance in subsection 248(1) of the Income Tax Act is broad enough to include amounts such as compensation for mental stress and loss of reputation. Further, in your view, even though the claims for loss of reputation and mental distress are said to be different issues from that of the dismissal, damages received in respect of these claims are considered received pursuant to the loss of office or employment. You ask for our comments and confirmation as to whether or not your view is correct.
We agree with your view that a retiring allowance includes damages for mental stress and loss of reputation caused by or relating to a wrongful dismissal. However, whether or not these heads of damages are related to a claim for damages for wrongful dismissal is, in our view, a question of fact that can only be determined by reviewing all of the circumstances. According to the solicitor's representations, these two heads of damages are unrelated to the termination of employment. We can advise that the Department has in the past accepted similar representations where the facts so warrant.
In this case, it is conceivable that the facts giving rise to the claims for mental distress and loss of reputation might be unrelated to the facts surrounding the wrongful dismissal; however, we come to no conclusion on this point because we have no information as to the reasons and circumstances of the dismissal. The taxpayer's solicitor has not provided any explanation in this regard. We would suggest that a review of the pleadings filed in the lawsuit along with any minutes of settlement would be instructive of the facts, or, at the very least, the taxpayer's solicitor might offer some explanation of the facts surrounding the dismissal. In our view, if the taxpayer's solicitor is correct in his assertion that the facts giving rise to the dismissal are unrelated to the facts giving rise to the claims for mental distress and loss of reputation, we agree that amounts received in settlement of these latter claims would not be retiring allowances and thus no withholding of tax is required.
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch