Lengthy Wrongful Dismissal Suits Can Produce Lump Sum Averaging Opportunity

Lengthy Wrongful Dismissal Suits Can Produce Lump Sum Averaging <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com🏢smarttags" />Opportunity<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />

Itís a tough time for certain employees today.  As unemployment rises in response to the financial meltdown and global recessions, job loss is a reality in North America, with many receiving termination notices and often, that comes with wrongful dismissal suits.

Once settled, amounts are paid after the fact, with the result that taxable lump sums must be added to income in some cases.  Taxpayers receiving certain lump sum payments, including damages for loss of wages and pension benefits may qualify for special averaging provisions under the Income Tax Act.  The lump-sum payment must have been paid after 1994 from one of the following sources:

• income from an office or employment received under:

  • judgment from a court or other competent tribunal;

  • an arbitration award; or

  • a lawsuit settlement agreement (including damages for loss of office or employment);

• benefits from Unemployment Insurance or Employment Insurance;

• benefits from a superannuation or pension plan (other than non-periodic benefits such as lump-sum withdrawals);

• spousal, common-law partner or taxable child support payments; or

• benefits from a wage-loss replacement plan.

Amounts not qualifying include:

• an amount under normal collective bargaining, such as negotiated back pay (although an amount from an arbitration award does qualify);

• severance and bonuses that are accepted as paid (that is without a dispute);

• legal expenses;

• salary reimbursements;

• reimbursement of top-up payments;

• repayment of pension benefits;

• deduction of social assistance payments, workers' compensation, etc.

The averaging treatment is allowed under S. 120.31.  Definitions of qualifying amounts are in S. 100.2.  The qualifying amount received by the individual in the particular year (as outlined above) is deducted if that total is $3,000 or more.  The income is then added back into income for the year to which it applies.  The taxes for each year are then recalculated and if the averaging method results in a reduction in taxes, the current-year taxes are reduced accordingly.