25 January 2005 External T.I. 2004-0109341E5 - Pay in lieu of notice vs damages

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.

Principal Issues: Asked to clarify distinction between pay in lieu of notice and a payment of damages.

Position: Clarified that the nature of the payment changes when it is paid as damages.

Reasons: Explained differences.

XXXXXXXXXX 2004-010934
W. C. Harding
January 25, 2005

Dear XXXXXXXXXX:

Re: Pay in lieu of Notice and Retiring Allowances

This is in reply to your letter of December 24, 2004, in which you requested clarification of the comments found in paragraph 14 of Interpretation Bulletin IT-337R4 Retiring Allowances.

Written confirmation of the tax implications inherent in particular transactions can be provided by this Directorate 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, any inquiries should be addressed to the relevant tax services office. However, we are prepared to provide the following comments that may be of assistance to you. Please note that these comments are general in nature and are not binding on the Canada Revenue Agency ("CRA").

Our Comments

Paragraph 14 of IT-337R4 states:

"Payments in lieu of earnings for a period of reasonable notice of termination by virtue of the terms of the taxpayer's employment (explicit or implied) are considered income from employment. However, where a payment of damages arising from the loss of office or employment includes an amount in respect of the period of reasonable notice, this amount will be considered a retiring allowance."

As indicated in the first sentence of this paragraph, an amount received by an employee in lieu of reasonable notice pursuant to the terms of employment, explicit or implicit, or for a notice period required for termination of employment under provincial employment or labour standard laws, will be taxable as employment income.

The second sentence refers to a payment of damages arising from a loss of an office or employment. A payment of damages cannot include a payment in lieu of notice. However, a payment of damages may be identified as being paid for various reasons and may be identified, in part, as being in respect of the period of notice that an employee should have received.

If an employer pays an employee an amount in lieu of notice, the payment will be included in income as employment income. If the employer also pays another amount as damages, this latter amount must be treated as a retiring allowance. For example, if an employer pays $7,000 as a payment in lieu of notice and also pays damages of $50,000, then the $7,000 will be employment income and the $50,000 will be a retiring allowance.

On the other hand, if an employer fails to give notice or pay an amount in lieu of notice, and an award of damages arising from the loss of employment is paid, in part, to compensate the employee for the employer's failure, the whole amount will be treated as a retiring allowance. For example, if an employer pays $57,000 as damages with $7,000 being paid in respect to the employer's failure to give reasonable notice and $50,000 being paid as other damages, the whole amount must be treated as a retiring allowance.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch

??