F.B. Fontaine (613)957-2140
October 13, 1987
Dear Sirs:
Re: Reimbursement of Legal Fees Incurred by Dismissed Employee
This is in reply to your letter dated August 13, 1987 concerning the above-noted subject.
Our understanding of your concerns is as follows:
1. An amount is reimbursed by an employer to a dismissed employee for legal fees incurred by the employee in respect of an action for wrongful dismissal. You ask whether such an amount is considered to be a "retiring allowance" for the purposes of subparagraph 56(1)(a)(ii) of the Income Tax Act (the "Act").
2. An employer provides relocation counselling to a dismissed employee. You ask whether the value of this service would be considered to be a retiring allowance received by the employee.
A payment made to a taxpayer as reimbursement for legal costs, to the extent that such costs were incurred by him in respect of, and directly relate to, the conduct of an action in a wrongful dismissal/breach of contract, would not be considered to form part of a retiring allowance for the purposes of subparagraph 56(1)(a)(ii) of the Act. Withholding on such reimbursements would, therefore, not be required.
An amount received from an "employer" after retirement is taxable either as employment income by virtue of subsection 6(3) of the Act or as a retiring allowance by virtue of subparagraph 56(1)(a)(ii) of the Act. If the amount is in satisfaction of an obligation by the employer to the "employee" arising as a result of his employment, the amount is usually considered to be employment income unless it can be justified as a retiring allowance. If the obligation is in respect of long service or loss of office or employment, the amount likely would represent a "retiring allowance" as the term is defined under subsection 248(1) of the Act.
It could be argued that any counselling given to an employee upon or after ceasing employment would be given primarily for the employee's benefit regardless of whether or not the counselling was given by his employer's staff or someone else. It is, however, the Department's position that there would be no taxable benefit to the employee for in-house counselling, but that there would be a taxable benefit to the employee where the employer purchases the counselling services from a third party to the extent that the services related to the employee. In this case subsection 6(3) or subparagraph 56(1)(a)(ii) of the Act would apply depending on the particular circumstances. Any withholding on such a taxable benefit would depend on whether or not a payment was made to the employee. If the employee was not also in receipt of a cash payment, it would be unreasonable to insist upon withholdings from such a non-cash benefit. In all other cases, however, the employer must combine the employee's total remuneration or retiring allowance and withhold in accordance with paragraph 153(1)(a) or (c) of the Act.
We trust the above comments will be helpful to you. Yours truly,
ORIGINAL SIGNED BY
for Director Small Business & General Division Specialty Rulings Directorate Legislative & Intergovernmental Affairs Branch