R.B. Day (613)957-2136
October 5, 1987
20627/801
Re: Wrongful Dismissal - Damages & Settlement Amounts
We are writing in reply to your letter of August 6, 1987, wherein you requested clarification of this Department's position regarding an employee's obligation to report amounts received as reimbursements for legal costs and prejudgment interest with respect to a termination of employment. You have also requested clarification of the employer's withholding obligations regarding these amounts.
We will respond to your questions in the order in which they appear in your letter.
It is our view that the reimbursement for legal costs that were actually incurred by an employee and which directly relate to the prosecution of an action for wrongful dismissal, will not be considered to form part of a retiring allowance. As a consequence, withholding tax on these amounts will not be required.
With respect to prejudgment interest received by a taxpayer in 1984 and subsequent taxation years, pursuant to a settlement of or as a result of a judgment in a wrongful dismissal case, it is our view that such amounts need not be included in income. Accordingly, neither withholding tax nor reporting will be required of the employer on the payment of such amounts.
Yours truly,
ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR ROBERT H. JOYCE
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch