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In the recent case of Schwartz v. The Queen, the Supreme Court of Canada held that certain pre-employment damages received by a taxpayer were not taxable. The case involved a taxpayer who accepted an offer of employment from a company. Before he began working for the company, it withdrew the offer and informed the taxpayer that his services were not required. After some negotiations, the company paid him a lump sum of $360,000 as damages plus $40,000 as costs. Revenue Canada assessed the taxpayer, arguing that the damages were taxable either as employment income, as a retiring allowance, or as an unspecified source of income under section 3 of the Income Tax Act (section 3 includes income from all sources). The Court rejected the Canada Revenue Agency arguments and held that the damages were not taxable. The damages could not be considered employment income or a retiring allowance, simply because there was no employment to begin with. In particular, the Court held that in order for the damages to be considered a retiring allowance, they had to be paid in respect of a loss of employment which had already begun. In this case, however, the damages were paid in respect of a contract which was canceled before the taxpayer became obliged to provide services to the company. Therefore, the damages were not a retiring allowance. The Court also held that the damages were not taxable as a general source of income under section 3 of the Act. The Court held that the general provisions of section 3 should not apply where a more specific provision of the Act already deals with the payments in question. In this case, the provisions relating to retiring allowances were the relevant sections . However, for reasons discussed above, the damages were not a retiring allowance. In summary, it appears that damages are not taxable if they are paid as a result of a potential employer withdrawing an offer of employment from a taxpayer before the taxpayer begins the employment. If they are paid after the employment begins, they are normally taxable as a retiring allowance. |
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