17 June 2003 External T.I. 2003-0022515 - SETTLEMENT ON TERMINATION OF EMPLOYMENT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Taxation of amount received on termination of employment

Position: General information provided

Reasons: To clarify taxation of various elements of a settlement.

XXXXXXXXXX 								2003-002251
W. C. Harding
June 17, 2003

Dear XXXXXXXXXX:

This is in reply to your correspondence of June 5, 2003 concerning the taxation of amounts received as a consequence of a termination of employment.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.htm l.

You have requested clarification of the tax implications related to the payment of amounts described under the following general headings:

? Payment of wages,
? Payment of damages,
? Payment of legal fees,
? Payment of interest,
? Payment in respect of the reimbursement of tuition fees, and
? Payment in respect of advance repayments.

Specific comments on each type of payment are provided below. In general, an employer may pay these types of payments to an employee at the time of, or as a consequence of the termination of the employee's employment, and the payments may be treated as the payment of a retiring allowance, income from employment or a non-taxable amount, depending on the reasons for the payment. Interpretation Bulletin IT-337R3 Retiring Allowances provides further information concerning the appropriate treatment of these kinds of payments.

As discussed below, a former employer may be required to withhold income tax on some of the amounts, at rates set out in the Income Tax Regulations. The employee may also be required to include some or all of the amounts in income for the year in which the amounts are received. However, the employee may be able to claim certain deductions in respect of some of the amounts. The net amount will then be taxable to the employee when he or she files an income tax return for the year. As a consequence, the tax withheld by the employer may be more or less than the amount of tax payable by the employee. If an employer pays an additional amount to the employee in respect of this difference in the amount payable, this amount will generally be taxable to the employee as either income from employment or an additional retiring allowance, depending on whether the payment itself is income from employment or a retiring allowance as discussed in IT-337R3.

Our specific comments with respect to each of the above amounts are as follow.

Payment for wages

A payment of wages made in lieu of notice or as wages owing must be included in the employee's income as income from employment and not as a retiring allowance. The amount is subject to income tax withholding payable on remuneration.

Payment for damages

An amount paid as damages on the termination of an employee's employment is generally taxable as a retiring allowance and must be included in the recipient's income in the year received. A deduction may be made by the employee, to the extent provided in the Income Tax Act (the "Act"), for the portion of the amount received that is transferred into an RRSP or a registered pension plan as a regular contribution, or as a transfer of a retiring allowance, as explained in IT-337R3.

A retiring allowance is subject to withholding when paid to the individual. However, withholding is not required on the portion of the amount that is transferred into a registered pension plan or into an RRSP, to the extent that the employer believes the amount will be deductible by the employee as a contribution to an RRSP in computing the employee's income.

Payment of legal fees

An amount received as a consequence of a termination of employment that is paid to reimburse a former employee for legal expenses must generally be included in the amount received as a retiring allowance in the manner described above in respect of damages. However, an amount received as an award or reimbursement of legal expenses incurred by a former employee to collect or establish a right to a retiring allowance is not treated as a retiring allowance but must be included in the employee's income under paragraph 56(1)(l.1) of the Act. Paragraph 60(o.1) of the Act will then apply to permit a deduction for all or a portion of the legal expenses paid by the employee to collect or establish the right. The amount of the deduction in the year is limited to the amount included in income in the year or a preceding taxation year under paragraph 56(1)(l.1) and the amount of the retiring allowance or pension benefit received and included in income in the year or a preceding taxation year less any portion thereof that has been transferred to a registered pension plan or a registered retirement savings plan and deducted under paragraphss 60(j), (j.01), (j.1) or (j.2). Additional information and limitations on the deduction are discussed in IT-337R3. The payor is not required to withhold on the amount paid.

Payment for interest

Where an obligation to pay an amount is determined, an amount may be paid as interest on the amount owed. This amount is reportable as interest income in the recipient's income tax return and does not form part of a retiring allowance and is not subject to withholding.

Payment in respect to the reimbursement of tuition fees

The taxation of amounts paid to reimburse tuition fees cannot be ascertained in the absence of the particulars reasons for the payment. The tax treatment of employer-paid educational costs is set out in Income Tax Technical News No.13 and paragraphs 18 to 22 of Interpretation Bulletin IT-470R (Consolidated) Employees' Fringe Benefits. Essentially, our position is that when training is taken primarily for the benefit of the employer, there is no taxable benefit whether or not the training leads to a degree, diploma or certificate. Where specific training is taken by an employee in order to maintain or upgrade the employee's job-related skills, and it is reasonable to conclude that the employee will remain with the employer for a reasonable period of time after completing the course, then the training will generally be considered to primarily benefit the employer. Accordingly, reimbursement of the cost of such courses will generally not constitute a taxable employment benefit to the employee.

A taxable benefit arises when the training is primarily for the benefit of the employee. In this event, the amount will be included in the employee's income as a retiring allowance if it is paid as a consequence of the employee's retirement or loss of employment as discussed in IT-337R3. Otherwise the amount will be included as income from employment. In either event, the employer will be required to withhold income tax using rates set in the Income Tax Regulations for income from employment or retiring allowances, as the case may be, subject to any reduction that may be available if the amount is transferred into an RRSP or a registered pension plan as discussed above for damages.

A tuition tax credit is generally available to individuals as explained in Interpretation Bulletin IT-516R2 Tuition Tax Credit. However, where a reimbursement of tuition fees is not included in an employee's income, the employee will not be entitled to claim the tuition tax credit in respect of such courses. However, this position only applies where the reimbursement is received within a reasonably short period of time after the employee pays the tuition fees. Where the reimbursement of the tuition fees is not made within a reasonably short period of time after the course is taken, the reimbursement must be included in the employee's income when paid to the employee. The employee will then be entitled to claim the tuition tax credit with respect to these fees in the year in which the course is taken.

Payment in respect of advance repayments

The taxation of amounts paid to reimburse an advance cannot be ascertained in the absence of the particulars reasons for the payment. However, where the amount represents a payment made by a former employer as a consequence of the employee's termination and it is paid in respect of loans or advances of a personal nature received by the employee from a third party, the payment would be treated as a retiring allowance and would be subject to taxation as described above for damages.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
Manager
Deferred Income Plans Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch