Home Featured Federal Court overturns CRA’s denial of pandemic benefits over settlement payment from wrongful dismissal suit

Federal Court overturns CRA’s denial of pandemic benefits over settlement payment from wrongful dismissal suit

by HR Law Canada

The Federal Court has ruled that the Canada Revenue Agency’s (CRA) decision to deny financial support to an individual under two pandemic relief programs was unreasonable, sending the matter back to a different officer for reassessment.

In an application for judicial review, B.J. challenged the CRA’s determination that she did not meet the income thresholds required for the Canada Emergency Response Benefit (CERB) and the Canada Recovery Benefit (CRB). The court’s decision focuses on whether B.J.’s settlement payment from a wrongful dismissal suit, which she received before she applied for the benefits, should have been counted as qualifying employment income.

B.J. applied for CERB for several periods and later applied for CRB, asserting that her settlement funds exceeded the $5,000 income minimum. The CRA repeatedly found her ineligible on the grounds that the settlement constituted a “retiring allowance” under the Income Tax Act (ITA) rather than employment income. The court was asked to review two specific CRA decisions [Decisions] that again denied B.J.’s eligibility for these benefits.

B.J. argued that her settlement should be treated as severance pay, stressing that it reflected compensation for lost earnings. According to her, this payment derived directly from employment and therefore met the CERB and CRB legislation’s income requirements. The court agreed that, in the unique context of emergency relief legislation, the CRA had not provided adequate reasons for its rigid categorization of the settlement funds.

The court emphasized that the CERB and CRB Acts were enacted to provide “financial support in the form of targeted payments to workers who had suffered a loss of income due to the pandemic.” The CRA’s approach, the court found, was too narrow and failed to account for a more “remedial interpretation” of the statutes that would meet the legislation’s “broad, quick, and simple” goals.

Background

B.J. launched a wrongful dismissal lawsuit after losing her job and later received a settlement payment. She applied for the CERB and CRB in different eligible periods but was denied benefits by the CRA, which argued she did not meet the required $5,000 of employment or self-employment income. According to the CRA, the money B.J. received was categorized under the ITA as a retiring allowance rather than the type of income needed to qualify for pandemic relief.

B.J. requested multiple reviews of her file. The CRA again concluded that she had not earned sufficient employment income and that her work was not reduced because of COVID-19. Its position was that B.J. had not shown evidence of losing active employment or self-employment income specifically for pandemic-related reasons.

“The TP has no employment income from 2020 to show that her income was affected by COVID-19,” read part of the CRA’s explanation. It also stated that B.J.’s tax filings did not treat the settlement as employment income. B.J. argued that while she had placed the settlement money in an RRSP, the ITA did not explicitly bar severance payments from being counted as income. She maintained that her lump sum was intended to replace salary losses, placing her above the income threshold for CERB and CRB eligibility.

The decisions under review

The CRA manager responsible for the final decisions reviewed documentation on the settlement, which included the statement of claim, payment information and legal documents. The Manager ultimately concluded in the official notes that B.J. did not meet the pandemic benefit criteria.

“For CERB – The TP did not earn $5000 income. The TP’s hours were not reduced due to COVID-19. The TP did not stop working due to COVID-19. For CRB – The TP did not earn $5000 income,” the Manager wrote.

B.J. then applied for judicial review, challenging the CRA’s repeated stance that the settlement payment should not be treated as qualifying employment income. The Attorney General of Canada (Respondent) maintained that the Manager’s decision was reasonable because the ITA defines settlement money from employment-related litigation as a retiring allowance.

Court’s analysis

The court stated that while the CRA is generally required to administer legislation based on the eligibility criteria set out in law, its decisions must remain “transparent and intelligible.” According to the court, the CRA’s conclusions did not reveal why it preferred what the court called “a more restrictive statutory interpretation” without addressing the possibility that B.J.’s settlement could be viewed as lost employment income.

Quoting from the record, the court noted the Manager’s “brief mention that [B.J.] directed these funds to her RRSP account, and declared the income as such.” However, in the court’s view, that was insufficient to address the remedial purpose of emergency legislation intended “to benefit workers impacted by the COVID-19 pandemic.” The court found that failing to consider “text, context, and purpose” amounted to an unreasonable decision.

The court also highlighted that, in earlier provincial cases, courts recognized CERB payments as protective measures for workers who lost employment during the pandemic. While the CRA argued those precedents dealt with a different legal issue—namely whether CERB payments should reduce wrongful dismissal damages—the court concluded that a similar remedial mindset should apply when evaluating if a settlement meets income thresholds under the CERB and CRB Acts.

Respondent’s argument and court’s conclusion

The Respondent insisted that a retiring allowance does not count toward the $5,000 minimum. However, the court found the reasoning behind labelling the settlement a retiring allowance “lacked responsive justification.” Rather than analyzing the settlement’s nature as potential severance or compensation for lost salary, the CRA’s decision zeroed in on B.J.’s tax treatment of the funds.

The court reasoned that a taxpayer’s subsequent tax filing, even if it classifies settlement money in an RRSP, is not the sole factor that should govern pandemic benefit eligibility. The CRA is permitted to request more documentation or explore the details of any settlement to determine whether that sum replaced lost employment income. Quoting other case law, the court stated that a “robust form of review” is necessary when an individual faces potential loss of critical financial support.

Ultimately, the court granted the judicial review, “remitted to a different officer to be reassessed.” It held that the CRA’s analysis failed to “provide justification as to why [B.J.]’s income from the 2019 Settlement was ineligible.” The court also ordered costs of $1,000 to B.J.

For more information, see Judt v. Canada (Attorney General), 2024 FC 2012 (CanLII).

You may also like

Leave a Comment