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Income tax — $2 million payment on retirement was tax-free

My client had received a payment of almost $2 million after retiring from a Canadian company he had worked for for many years. The payment came from an overseas discretionary trust, originally set up by the foreign owner of the corporate group. The client asked me whether he needed to report the payment as income on his tax return and pay almost $1 million in tax on it. His accountant had advised that he should.

I prepared a 48-page legal opinion that reviewed in detail some 20 different possible treatments the payment might be given under the Income Tax Act, such as employment income, employment benefit, retirement compensation arrangement payment, pension benefit, income or capital from the trust, employees profit sharing plan and employee benefit plan. On a detailed review of the legislation and the particular facts of the case, I concluded that, while the tax treatment was not entirely certain, it was reasonable to consider the payment to be a non-taxable payment of trust capital.

The client filed on that basis, and the CRA did not challenge his position.

(2013)