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.
The Brink Case: A Settlement That Wasn’t
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:
Most Settlements Are Taxable — But Not All of Them
Generally yes — wrongful dismissal settlements are taxable in Canada. But how much tax you pay depends entirely on how the payment is structured. Two people can receive the same dollar amount and walk away with very different after-tax figures.
“The tax treatment of the settlement payment was a condition of fundamental importance to both parties… This is a significant gap that cannot be overlooked or resolved by resorting to common sense or common practice…”
How Different Payments Are Taxed
Pay in lieu of notice — fully taxable as employment income. CPP and EI are deducted before you receive it.
Retiring allowance — taxable, but no CPP or EI deductions. A portion may be transferable to an RRSP without affecting your contribution room if you have pre-1996 service.
General damages for human rights violations or injured feelings — generally not taxable as employment income. This is the most commonly missed tax planning opportunity in any settlement.
Punitive damages — depends on the specific circumstances and how the award is characterized.
Why Settlement Structure Matters
The total amount of your settlement is only half the picture. The after-tax amount is what you actually receive — and that number is directly affected by how your settlement agreement allocates the payment.
A settlement allocated entirely as pay in lieu of notice is fully taxable. The same amount split between pay in lieu of notice, a retiring allowance, and general damages results in a meaningfully lower tax bill — legally and legitimately.
You cannot restructure a settlement after it is signed. Get the structure right before you agree to anything.
Legal Fees Are Generally Tax Deductible
Legal fees paid to collect or establish a right to employment income — including wrongful dismissal settlements — are generally deductible against the settlement income received. Keep every invoice from your lawyer. Your accountant will need them.
What to Do Before You Sign
1/ Ask how the settlement is allocated — pay in lieu of notice, retiring allowance, and damages are all taxed differently
2/ Do not accept your employer’s proposed structure without advice — it may favour their tax position, not yours
3/ Get tax advice alongside legal advice — the after-tax value is the number that actually matters
4/ Keep legal fee records — these may reduce your taxable income
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