You are in a mediation and close to settlement. But alas, at the 11th hour, there is a gap that cannot seem to be bridged between the parties.
Before everyone packs up and goes home, it is worth putting some thought into whether there is any opportunity to maximize the available settlement dollars by lawfully utilizing taxation categories. This can potentially help to close the settlement gap, putting more money in client pockets and settling a matter while you have the parties in the same building. Here are some questions you may want to ask:
1. What funds can be allocated as a retiring allowance, rather than taxed as employment income?
Damages paid to reimburse for, or in lieu of, salary or wages are considered employment income and will be subject to regular tax withholding rates. Employers must also deduct and remit CPP and EI from these amounts which, although this has value for the employee, also tends to “eat up” a portion of the dollars being paid out by an employer in a settlement. Examples that fall into this category include any payment in lieu of termination notice provided pursuant to section 61 of the Employment Standards Act, 2000 (“ESA”) or an employment contract.
Most other damages resulting from a loss of employment can be characterized as a retiring allowance, including severance pay pursuant to section 65 of the ESA. The benefit of a retiring allowance includes that it is taxed differently than employment income (see below). Secondly, there is no requirement to deduct and remit CPP or EI on a retiring allowance amount. There may also be opportunities to consider the timing of payments to lawfully minimize tax consequences in a given taxation year.
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