On June 22, 2023, the federal government introduced changes to the reportable transaction provisions of the Income Tax Act, impacting settlement offers in employment disputes. The amendments require reporting to the CRA if a settlement is structured to avoid taxes, potentially attracting scrutiny.
Settlement agreements involving tax avoidance mechanisms or indemnity provisions must be reported to the CRA. For example, general damages for pain and suffering are considered non-taxable income. However, if an amount is allocated to general damages as part of a tax avoidance strategy, it may be considered a reportable transaction. There is a risk of audits for reported transactions, emphasizing the need for careful consideration by both employers and employees on how a settlement offer is structured. It should be noted that not all reported transactions will be deemed unacceptable.
Failure to report a reportable transaction within 90 days can result in severe penalties. The evolving nature of these requirements suggests the importance of a cautious approach to future settlement agreements.
If you are someone who might be affected by this rule change or have any questions please reach out to one of our experienced lawyers at 250-374-3344.
Disclaimer: This is not legal advice