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        Employment lawyers restricted to wrongful dismissal litigation
         Employment lawyers restricted to wrongful dismissal litigation

Toronto

Ontario

Canada

 

 

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Labour and Employment Lawyers in Toronto
Employment lawyers restricted to wrongful dismissal litigation

Tel: (416) 590-1900
Fax: (416) 590-1600

info@dumarkowitz.com

17th Floor, Yonge/Eglinton Centre
2300 Yonge Street
Suite 1750
Toronto, Ontario
M4P 1E4


"Work  is one of the most fundamental aspects in a person's life, providing the individual with a means of financial support and, as importantly, a contributory role in society.  A person's employment is an essential component of his or her sense of identity, self-worth and emotional well-being."

-- Chief Justice Dickson, in Reference re: Public Service Employee Relations Act (Alberta), [1987] 1 S.C.R. 313 (Supreme Court of Canada),
at page 368.

 

 

Lawyer and Chartered Accountant Stephen Du advises client on:

Minimizing tax bite: strategies to reduce income taxes payable on the severance package

Even when you are wrongfully dismissed, the taxman still wants his cut from your severance package.  However, with the co-operation of the employer, severance packages can be structured to lessen the tax burden, resulting in more take-home pay for you.

"Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be" – such are the words pronounced by the British House of Lords in the 1936 case of IRC v Duke of Westminster, in recognition of a taxpayer’s right to use legal means at his or her disposal to minimize the tax grab.

First, an employee should understand what type of payments on termination are taxable. Salaries in-lieu-of notice or retiring allowances are fully taxable, whereas reimbursement of legal fees and settlements paid in respect of Human Rights complaints are generally not taxable. Compensation for tort damages, such as for emotional distress or humiliation suffered as a result of a wrongful dismissal, may or may not be taxable depending on the circumstances. Other things that are useful to note is that if you have been working since before 1996, a portion of your severance package can be paid directly into your RRSP as a retiring allowance “rollover”, and therefore not taxed.

The rules regarding emotional distress is quite murky and courts have been known to rule erratically.  However, the principle is quite clear: if the amount is paid as compensation for personal injury, which includes emotional or psychological damage, then the amount is not taxable. If, however, the amount is characterized as payment for lost employment, then the amount is taxable.  

While emotional distress and psychological damage is often present in a wrongful dismissal, our experience is that many severance packages totally ignore psychological damages. An employee should consult his or her lawyer to ensure that, if psychological damage is in fact suffered, a portion of any settlement package should be designated as compensation as psychological damage. While that designation by itself does not make the compensation tax free, it goes a long way to prove to the tax department that it should not be taxed.

If you incurred legal costs to sue for a settlement package, your legal costs are deductible as an “other deduction” on your tax return.  Instead of waiting for your tax refunds, you may also designate a portion of your severance package as reimbursement for legal expense, with the employer’s consent.  This way, no withholding tax, CPP or EI premiums will be deducted from such reimbursements.   When times are tough, the added cash flow often comes as a welcome relief to the wrongfully dismissed employee.

  

 
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