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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Can payment by a partnership to a former partner who has been bought out and to his spouse, who provided consulting services to the partnership, be categorized as retiring allowances.
Position: Question of fact, but based on the information provided, no.
Reasons: In both cases, there was no employment relationship.
August 2, 2002
Calgary Tax Services Office HEADQUARTERS
Sherri Lee James P. Kohnen, CMA
Verification and Enforcement 957-2093
Division
2002-014860
Retiring Allowance - Partnership
This is in reply to your submission of June 24, 2002, in which you requested our views regarding the deductions taken by the subject taxpayer and his spouse in respect of amounts they received that they claimed as retiring allowances and further to our telephone conversation (Jesudason/Kohnen) of July 19, 2002.
Your submission provided general details concerning the facts and transactions that apply to your request. We have summarized the most significant facts in your submission as follows:
1. The taxpayer, who was not identified in your submission, reported income from self-employment as a XXXXXXXXXX for the years XXXXXXXXXX inclusive.
2. In the initial years of the above period, the taxpayer operated the business as a proprietor.
3. In the latter years the firm became a partnership, with the taxpayer being one of the partners.
4. The taxpayer's spouse provided consulting services to the firm and at all times reported her income as self-employed business income.
5. The taxpayer sold his partnership interest in XXXXXXXXXX, at which time amounts were paid to him and his spouse by the partnership. These amounts were transferred to registered retirement savings plans ("RRSPs") at that time and were categorized by the payor (the partnership) as retiring allowances.
The term "retiring allowance" is defined in subsection 248(1) of the Income Tax Act (the "Act"). Retiring allowances are certain amounts received on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or in respect of a loss of an office or employment. Thus, in order to characterize a payment as a retiring allowance, there must have been an employment relationship, that relationship must have terminated, and the payment must be made in respect of that termination. The existence of an employment relationship is a question of fact.
Your submission referred to two documents that were discussed during a telephone conversation (James/Baldwin) on June 19, 2002. In our document 9409700, it was our view that the payment by a partnership to a partner was not in recognition of his prior employment with the firm, and therefore not a retiring allowance. In our document 1999-0015925, we took the view that there are few situations in which the facts would support a conclusion that a payment to a former partner by a partnership would be in recognition of the former partner's long service as an employee before becoming a partner. We have enclosed severed copies of the two documents referred to above for your consideration.
Your submission noted that the taxpayer has presented an argument that the payment does qualify for a deduction under paragraph 60(j.1) of the Act in respect of the transfer to RRSP, pursuant to 13(b)(i) of Interpretation Bulletin IT-337R3. It is noted that 13(b)(i) summarizes subparagraph 60(j.1)(iv) of the Act, which expands the term "person related to the employer" to include any person whose business was acquired or continued by the employer. We assume that the taxpayer is advancing an argument that the new partnership is a person related to the former partnership (of which he was a partner). The establishment of a payor as a person related to the employer generally impacts the determination of years used in the calculations in paragraph 60(j.1), however, if neither he nor his spouse were in an employment relationship with the partnership, the amounts received can not be retiring allowances. Accordingly, paragraph 60(j.1) would not be applicable.
We trust that the above comments will be of assistance to you. Please do not hesitate to contact Phillip Kohnen at (613) 957-2093 should you require further information.
Mickey Sarazin, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
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