4 March 2011 External T.I. 2011-0393351E5 - Settlement

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: Whether a settlement payment made to conclude arbitration to resolve grievances against the employer is taxable as income.

Position: The settlement as described meets the definition of a retiring allowance.

Reasons: The payment satisfies the two-prong test established by the courts for the purpose of determining whether a payment is a retiring allowance.

XXXXXXXXXX 						2011-039335
							Rita Ferguson
							519-645-5261
March 4, 2011

Dear XXXXXXXXXX :

Re: Settlement

This is in response to your e-mail of January 19, 2011 inquiring about the taxability of the settlement payment you received from your former employer, XXXXXXXXXX (the "Employer"). The settlement payment was made in order to resolve two grievances that were in the process of arbitration. As part of the settlement agreement you resigned your employment with the Employer and agreed not to apply for any other positions with the Employer for a period of five years. You wish to know whether the settlement payment would be considered non-taxable as damages received for personal injury.

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 a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

Subparagraph 56(1)(a)(ii) of the Income Tax Act (the "Act") requires a taxpayer to include in computing income for a taxation year the amount of a retiring allowance received by the taxpayer in the year. The definition of "retiring allowance" in subsection 248(1) of the Act includes an amount received "in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal."

The CRA's general views regarding retiring allowances are set out in Interpretation Bulletin IT-337R4 "Retiring Allowances". Paragraph 5 states:

A retiring allowance includes an amount received in respect of a loss of office or employment. In this context, the words "in respect of" have been held by the Courts to imply a connection between the loss of employment and the subsequent receipt, where the primary purpose of the receipt was compensation for the loss of employment. (See also ¶ 11). Two questions set out by the Courts to determine whether a connection exists for purposes of a retiring allowance are as follows:

1 - But for the loss of employment would the amount have been received? and,

2 - Was the purpose of the payment to compensate a loss of employment?

Only if the answer to the first question is "no" and the answer to the second question is "yes", will the amount received be considered a retiring allowance.

The determination of whether a particular amount received by an employee upon or after termination of employment constitutes employment income, a retiring allowance or damages for personal injury can only be made after a thorough review of all of the circumstances relevant to the particular situation. This would require a review of the settlement agreement, the employment contract and any other agreements giving rise to the payment. Since a written settlement agreement is often couched in standard terms, it would also be necessary to review any statements of claims, relevant correspondence between the parties, etc., to ascertain the true nature of the payment made under a settlement agreement. We note, however, that damages received in connection with a loss of employment fall within the definition of a retirement allowance. In our view, based on the description you have provided of the terms of the settlement agreement, the payment you have received is a retiring allowance which is to be included in taxable income.

We trust that these comments have been of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch