I often see clients-both employees and employers-eager to reach a resolution after a wrongful dismissal. Settling a case can bring much-needed closure and certainty. But as the recent case of Brink v Xos Services (Canada), Inc., 2025 BCSC 658 highlights, even when the dollar figure is agreed upon, a settlement can fall apart if the parties don’t see eye-to-eye on how the payment will be taxed.
In Brink, both sides agreed on a settlement amount: $441,667 USD. The employer’s offer was “less statutory deductions”-meaning they intended to withhold taxes as if the payment were employment income. The employee, however, accepted only on the condition that the payment be treated as nonemployment income, akin to “general damages” in Canadian law, which can sometimes be non-taxable.
This wasn’t just a minor detail. For the employee, being taxed at the usual 32% rate would mean losing up to $143,300 to the taxman. For the employer, paying the full amount without deductions could expose them to risk if the Canada Revenue Agency (CRA) later decided the payment should have been taxed as income. Both parties had a lot at stake, and neither was willing to budge.
The court ultimately found there was no binding agreement. Justice Hughes wrote:
This scenario isn’t unique to Brink. I’ve worked with many clients who are surprised to learn that the way a settlement is characterized-wages, retiring allowance, general damages, or legal fees-can have a major impact on how much they actually receive after taxes. For example:
• Wages or salary continuance: Subject to full withholdings (income tax, CPP, EI).
• Retiring allowance: Taxed at lump sum rates, but no CPP or EI deductions.
• General damages: Only non-taxable if they relate to something other than the loss of employment (e.g., human rights breaches or personal injury). If they’re really just a substitute for lost income, CRA will expect tax to be withheld.
• Legal fees: Non-taxable if paid directly to your lawyer.
If the parties don’t agree on the allocation-and especially if one side wants to minimize tax while the other wants to avoid CRA scrutiny-settlement talks can quickly derail.
Recently, we helped a client who had been offered a generous lump sum by their former employer. The employer’s offer was “less statutory deductions,” but our client wanted the payment characterized as general damages for alleged workplace harassment, hoping to avoid tax.
We explained that unless there was clear evidence of a human rights breach or personal injury, CRA would likely view the payment as taxable income. The employer, wary of future tax liability, refused to pay the full amount without deductions.
Ultimately, we helped both sides reach a compromise by allocating a portion as legal fees (non-taxable) and the remainder as a retiring allowance, with appropriate withholdings. It wasn’t exactly what either party wanted, but it was a deal both could live with.
The Brink case is a cautionary tale: agreeing on the amount isn’t enough. Both sides must also agree on the tax treatment-otherwise, there’s no deal. Here’s what we recommend:
• Get tax advice early: Before you settle, understand how the payment will be taxed and what documentation is needed.
• Be realistic about CRA’s position: Trying to characterize a settlement as non-taxable without solid grounds can backfire, exposing both parties to audits and penalties.
• Put it in writing: The settlement agreement should clearly state how each portion of the payment will be treated for tax purposes.
We make it a priority to walk our clients through these issues before finalizing any settlement. We believe in resolution-first, but only when the resolution is clear, enforceable, and tax smart.
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