2020-0847041R3 Payment of 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: What is the tax character of a payment of damages payable to a terminated employee resulting from a wrongful dismissal suit?

Position: The payment constitutes a retiring allowance.

Reasons: The payment is in respect of loss of employment and falls within paragraph (b) of the definition of retiring allowance in subsection 248(1).


Section: 248(1) - definition of "retiring allowance"

XXXXXXXXXX                                                                                                      2020-084704




Re:   Advance Income Tax Ruling Request


This is in reply to your letter dated XXXXXXXXXX that we received on XXXXXXXXXX, requesting an advance income tax ruling (“Ruling”) on behalf of the above-referenced taxpayer with respect to a proposed payment of damages to a former employee.

To the best of your knowledge and that of the taxpayers involved, none of the proposed transactions or issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:

i.    in a previously filed tax return of the taxpayer or a related person and:

A.    being considered by the CRA in connection with such return;
B.    under objection by the taxpayer or a related person; or
C.    the subject of a current or completed court process involving the taxpayer or a related person; or

ii.   the subject of a Ruling request previously considered by this Directorate.


Unless otherwise stated:

i.    all references to a statute are to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the Act), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the Regulations);

ii.   all terms and conditions used in this Ruling that are defined in the Act (or in the Regulations) have the meaning given in such definition;

iii.  all references to monetary amounts are in Canadian dollars; and

iv.   the singular should be read as plural and vice versa where the circumstances so require.

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions (as defined below) will be referred to as follows:

“CRA” means the Canada Revenue Agency;

“Employee” means XXXXXXXXXX

“Employer” means the XXXXXXXXXX; and

“Judgment” has the meaning assigned by paragraph 5.


1.    The Employer is a corporation incorporated under the laws of the Province of XXXXXXXXXX. Its business number is XXXXXXXXXX. The Employer deals with the XXXXXXXXXX Tax Services Office and files its tax returns with the XXXXXXXXXX Tax Centre.

2.    The Employee’s Social Insurance Number is XXXXXXXXXX. The Employee is resident of XXXXXXXXXX, Canada. The Employee deals with the XXXXXXXXXX Tax Services Office and files his tax returns with the XXXXXXXXXX Tax Centre.

3.    The Employee’s employment with the Employer was terminated on XXXXXXXXXX.

4.    On XXXXXXXXXX, the Employer made a payment to the Employee of $XXXXXXXXXX, less applicable statutory source deductions, representing wages for a XXXXXXXXXX-week statutory notice period and vacation entitlement. The Employer reported the payment as employment income on the Employee’s T4 slip.

5.    The Employee took legal action against the Employer and filed a claim in the XXXXXXXXXX alleging wrongful dismissal. A decision was rendered in XXXXXXXXXX (the “Judgment”).

6.    Pursuant to the Judgment, the Employee was awarded damages in the following amounts:


7.    The total amount of damages payable by the Employer to the Employee is $XXXXXXXXXX, after deducting the amount previously paid as described in paragraph 4.

Proposed Transaction

8.    The Employer will make a payment to the Employee of the amount described in paragraph 7 and remit, on behalf of the Employee, the applicable income tax withholdings to the Receiver General.

Purpose of Proposed Transaction

9.    The purpose of the proposed transaction is to enable the Employer to fulfill its obligation under the Judgment.

Rulings Given   

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction and purpose of the proposed transaction, and provided further that the proposed transaction is completed in the manner described above, we rule as follows:

The payment described in paragraph 8 (including the income taxes withheld) will qualify as a retiring allowance as defined in subsection 248(1) and will be included in the Employee’s income for the year of receipt under subparagraph 56(1)(a)(ii). The payment will be subject to income tax withholdings pursuant to paragraph 153(1)(c) and subsection 103(4) of the Regulations.

These rulings are subject to the limitations and qualifications set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations, dated April 23, 2019, and are binding on the CRA provided that the proposed transaction is completed no later than XXXXXXXXXX.


The above rulings are based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of any tax consequences relating to the facts, or any transaction or event taking place either prior or subsequent to the implementation of the proposed transactions, whether described in this letter or not, other than those specifically described in the rulings given above.

As explained in T4001 Employers' Guide - Payroll Deductions and Remittances, retiring allowances are reported by the payer on a T4 slip. The combined federal and provincial withholding tax rate for amounts exceeding $15,000 that are paid to a resident of Canada (other than Quebec) is 30% on the entire amount. There is no requirement to deduct Canada Pension Plan contributions or Employment Insurance premiums.

Yours truly,



for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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