9 January 2001 Internal T.I. 2000-0061537 - Retiring allowance paid to non-resident

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. Whether a retiring allowance paid to a non-resident of Canada is subject to taxes under Part I of the Act?

2. If a non-resident of Canada is reporting a benefit under 80.4(1) of the Act, can he take advantage of the deduction under paragraph 20(1)(c)?

Position:

1. No.

2. No.

Reasons:

1. Previous position - a "retiring allowance" as defined in subsection 248(1) of the Act, paid to a non-resident of Canada would not be subject to tax by virtue of subsection 114 and 115 of the Act.

2. The loss of the deduction in the above circumstances is solely a consequence of the Canadian tax system with respect to non-residents.

		January 9, 2001

	Calgary Tax Services Office	HEADQUARTERS
	Small & Medium Business Audit	Karen Power, CA
(613) 957-8953
	Attention:  Bob Gray
		2000-006153

Taxation of a Retiring Allowance and Application of Section 80.4 to a Non-Resident

We are replying to your letter of December 13, 2000, in which you requested our opinion on whether the payment of a retiring allowance to a non-resident of Canada would be subject to Part I tax. In addition you have asked that we comment on whether it is appropriate to tax benefits received by non-residents under subsections 80.4(1) of the Income Tax Act (the "Act") where no deduction is available by virtue of the provisions of section 80.5 and paragraph 20(1)(c) of the Act.

The facts, as we understand them, are as follows:

• Canco is a Canadian-controlled private corporation established over XXXXXXXXXX years ago. Canco has been involved in commercial leasing throughout the last XXXXXXXXXX years. In XXXXXXXXXX, Canco sold all of its assets to an arm's length purchaser and reported all of the required capital gains and recapture.
• On XXXXXXXXXX, Mr. A, the main shareholder of Canco, resigned as an officer of the corporation. Over the last several years Mr. A has received approximately $XXXXXXXXXX per year in wages from the corporation. As of XXXXXXXXXX, the following amounts were described in Canco's minute book as payable to Mr. A:

bonus $XXXXXXXXXX
retiring allowance $XXXXXXXXXX

• In XXXXXXXXXX, Mr. A ceased to be a Canadian resident and moved to XXXXXXXXXX. The bonus and retiring allowance were paid to the shareholder's loan account in XXXXXXXXXX. The bonus was subjected to Part I taxes and Part XIII taxes were remitted on the retiring allowance.

Our Comments

The determination of whether a lump-sum amount or a portion of the lump-sum amount paid to an employee on termination of employment constitutes "pay in lieu of notice" or a "retiring allowance" is a question of fact that can only be determined after all of the facts pertaining to each particular case have been reviewed. As discussed in paragraphs 5, 6 and 9 of Interpretation Bulletin IT-337R3, a payment will qualify as a retiring allowance if it is received in recognition of long service or in respect of a loss of an office or employment. A payment for a loss of an office or employment usually refers to the elimination or expiration of a particular office or employment. This would include the abolition of a job or position or the loss of an income source for an employee who is released from an office or employment, whether unilaterally or not. A retiring allowance also includes any amount received on account of, or in lieu of, damages.

We have not been provided with sufficient details to determine whether the $XXXXXXXXXX payment would be considered a retiring allowance as defined in subsection 248(1) of the Act. Such a determination would require a review of all of the facts.

It is, however, the Agency's view, that a "retiring allowance" as defined in subsection 248(1) of the Act, paid to a non-resident of Canada would not be subject to tax by virtue of subsections 114 and 115 of the Act. A person paying a retiring allowance to a non-resident person is normally required, by virtue of paragraph 212(1)(j.1), to withhold 25% of the retiring allowance on behalf of the non-resident. This withholding tax may be waived if certain conditions contained in subparagraphs 212(1)(j.1)(i) and (ii) have been met. There are currently no provisions under the Act which would subject a retiring allowance paid to a non-resident to Part I taxes.

You have also questioned whether it is appropriate to tax benefits received by non-residents under subsection 80.4(1) of the Act where no deduction is available by virtue of the provisions of section 80.5 and paragraph 20(1)(c) of the Act.

Subject to the application of any bilateral income tax treaty, paragraph 115(1)(a)(i) of the Act will apply to include under Part I the taxable benefit received by a non-resident under subsections 80.4(1) and 6(9) of the Act. However, in the situation you describe, the loan was not used to earn income that will be subject to Part 1 tax in Canada, and the non-resident individual will, therefore, not be able to take advantage of the deduction that would have been available under paragraph 20(1)(c) of the Act had he been a resident of Canada and used the loaned funds to earn income.

The loss of the deduction in the above circumstances is solely a consequence of the Canadian tax system with respect to non-residents. Under Part XIII of the Act, non-residents are taxed on their gross income and any expenses incurred by a non-resident in earning income that is subject to Part XIII tax, with the exception of income that is eligible for an election under sections 216 or 217 of the Act, are not taken into consideration in the computation of the Part XIII tax.

We would like to point out that the loss of the paragraph 20(1)(c) deduction in the above scenario with respect to the deemed interest expense (i.e. section 80.5) is consistent with the loss of the paragraph 20(1)(c) deduction in a situation where a non-resident has incurred actual interest expense (i.e. interest paid on the loan). The loss of the deduction in the latter case where an individual severs his residential ties with Canada is, relatively speaking, a common occurrence.

We trust our comments will be of assistance.

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch