J.D. Jones (613) 957-2104
DEC 14 1989
Dear Sirs:
Re: Wrongful Dismissal - Pre-Settlement Interest
This is in reply to your letter of September 29, 1989, wherein you requested our confirmation of your understanding of the income tax treatment of the interest component of a court award or a settlement payment in respect of a wrongful dismissal action.
You have asked us to confirm that an amount received by a taxpayer pursuant to a judgement or settlement, of a wrongful dismissal action as pre-judgement or pre-settlement interest is not included in income and, accordingly, neither withholding of tax at source nor reporting is required with respect to the payment of such an amount. Additionally, you have asked us to confirm that on the assumption that the payment of a retiring allowance in these circumstances by the former employer is deductible in computing the employer's income, that an amount paid as pre-judgement or pre-settlement interest on the principal amount of the award or settlement amount will be deductible by the former employer.
We advise it is the Department's position that pre-judgment or pre-settlement interest received by a former employee in wrongful dismissal cases will be excluded from a taxpayer's income and, as such neither withholding tax nor reporting of such amounts is required. Additionally, assuming the payment of a retiring allowance in these circumstances by the former employer's income, we advise it is our view that an amount paid as pre-judgement or pre-settlement interest on the principal amount of the award or settlement amount would be deductible by the former employer provided section 67 of the Income Tax Act does not have application.
We trust our comments are of assistance to you.
Yours truly,
ORIGINAL SIGNED BY
Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch