Relying on a decision of the Tax Court of Canada's Chief Justice Rip, Justice Harrington agreed with Ms. Newcombe that the payment was not taxable because it was for settlement of her grievances.
But this was not a Tax Court case. Ms. Newcombe had missed the objection time limits so that she couldn't appeal to the Tax Court of Canada. Instead, she had come to the Federal Court to get an order that the Department of Justice give her a corrected T4. Justice Harrington said that, though he agreed the amount wasn't taxable, he had no jurisdiction to correct the error.
As the judge said: "The issue is not the incorrect T4 form, but rather the Notice of Assessment." (Para. 27) And the only way to attack a wrong Notice of Assessment is through the objection and appeal process. He noted that the Department of Justice had not acted in bad faith and s. 227(1) of the ITA protects employers who withhold and remit amounts, even wrongly. (Para. 28) And, as an employee is deemed to have received the withheld amount (ITA s. 153(3)), Ms. Newcombe had no right to sue her employer for breach of contract either.
As s. 12 of the Tax Court of Canada Act gives the TCC exclusive jurisdiction over tax appeals, the Federal Court had no power to help Ms. Newcombe. (Paras. 30-31). And even if the Judge ordered the employer to issue a T4, CRA is not bound by any return or form: ITA s. 152(7); so there was no point to such an order.
Justice Harrington noted that Ms. Newcombe might have some remedies, though: She could apply to CRA under Taxpayer Relief for a reassessment to exclude the termination payment from her income: ITA s. 152(4.2). Or she could ask for a waiver of interest and penalty. (Paras. 33-35.)
See Newcombe v. Canada, 2013 FC 955 (Harrington)