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:
Whether a salary deferral arrangement has been created by the proposed amendments to a unionized employment contract of an employer. The same amendment is being made with respect to management employees. The proposed amendments are expected to be agreed to in XXXXXXXXXX and are such that the accumulation of years for the calculation of severance payments will be capped as at XXXXXXXXXX . Severance payments will still be based on salary at the date of retirement but years of service after XXXXXXXXXX will no longer qualify. Upon XXXXXXXXXX , the employees will be able to elect to receive the amount in XXXXXXXXXX based on XXXXXXXXXX salary and years of service. Management employees can make similar elections in XXXXXXXXXX .
Position:
The ability to elect to receive the amount creates a right to receive salary and wages. However, even though a right to receive an amount has arisen, salary deferral arrangements have not been created because the main purpose test in the SDA definition has not been met.
Reasons:
There are special circumstances such that the purpose test is not met. For those who do not elect to receive the amount in XXXXXXXXXX , the main purpose for not making the one-time election to receive the one-time payment is not to postpone taxes payable. There is a pre-existing term of employment for managers, or in a contract for the unionized employees, to receive an amount at retirement that has not changed other than the accumulation of years in the calculation. For those who do elect to receive the amount, the fact that the employer needs time to make the calculations and cannot make a payment until XXXXXXXXXX should not result in an SDA as the main purpose is not to postpone the payment of tax. Anyone who elects to receive the payment will have employment income upon receipt in XXXXXXXXXX . The amendment to the plan should not affect the treatment of the amount upon retirement for those who do not elect.
XXXXXXXXXX 2003-001163
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX (the "Corporation")
This is in reply to your letters of XXXXXXXXXX that consolidated and restated the Corporation's advance income tax ruling request of XXXXXXXXXX. We acknowledge the submissions received in respect of this request and the meeting held on XXXXXXXXXX.
We understand that, to the best of your knowledge and that of the Corporation, none of the issues involved in this ruling request is:
? in an earlier return of the Corporation or a related person;
? being considered by a tax services office or by a taxation centre in connection with a previously filed tax return of the Corporation or a related person;
? under objection by the Corporation or a related person;
? before the courts; nor
? the subject of a ruling previously issued by the Directorate to the Corporation or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
FACTS
Our understanding of the facts, proposed transactions and purpose of the proposed transactions are as follows:
A. The Corporation
1. The Corporation was created in XXXXXXXXXX. The address of the Corporation is XXXXXXXXXX. The business number of the Corporation is XXXXXXXXXX.
2. XXXXXXXXXX.
B. XXXXXXXXXX Termination Benefit (the "XXXXXXXXXX TB").
3. XXXXXXXXXX.
4. XXXXXXXXXX.
5. XXXXXXXXXX.
6. The XXXXXXXXXX TB, which is available to both management and unionized employees, entitles a qualifying employee of the Corporation to a retiring allowance, which is based on the employee's basic pay as of the date of termination of employment, the number of years of "eligible service", and whether the employee retires, resigns or is terminated. Eligible service is the period of continuous employment with the Corporation and also includes continuous employment in XXXXXXXXXX prior to the establishment of the Corporation
7. The maximum number of years of service on which an XXXXXXXXXX TB is based is XXXXXXXXXX. This is reduced to XXXXXXXXXX if an employee resigns or, in certain circumstances, is terminated.
8. The XXXXXXXXXX TB is calculated based on XXXXXXXXXX salary per year of service. This is reduced, in certain cases, by XXXXXXXXXX if an employee resigns and to XXXXXXXXXX if the employee is terminated for cause.
C. Two Employee Groups of the Corporation XXXXXXXXXX
9. The Corporation began negotiations on XXXXXXXXXX, with its unionized employees represented by the XXXXXXXXXX ("Union Group I"), with respect to a contract that expired on XXXXXXXXXX. Approximately XXXXXXXXXX of the Corporation's XXXXXXXXXX unionized employees are Union Group I employees. Proposed amendments to the XXXXXXXXXX TB, as reflected in 14 through 17 below, are part of the current labour negotiations with Union Group I. Union Group I and the Corporation have both expressed a strong desire to bring negotiations to a successful completion. The Corporation is optimistic that a conclusion will be reached in the near future.
10. There are approximately XXXXXXXXXX management employees of the Corporation. Proposed amendments to the XXXXXXXXXX TB were tabled with them in XXXXXXXXXX to the effect that management employees will no long accrue any additional years under the XXXXXXXXXX TB. Management employees will be entitled to XXXXXXXXXX salary (or XXXXXXXXXX of that in the event of resignation) for each year and partial year of continuous eligible service up to XXXXXXXXXX only, subject to a maximum of XXXXXXXXXX in respect of retirement or death and XXXXXXXXXX in respect of resignation.
11. Also tabled in XXXXXXXXXX was notice that management employees will be given a one-time opportunity to elect to accelerate the receipt of this retiring allowance by way of a single payment. If an employee elects to receive his or her XXXXXXXXXX TB early, the amount paid will be based upon his or her basic pay as at XXXXXXXXXX. Employees who do not exercise this right will not be permitted to cash-in their XXXXXXXXXX TB, or any portion thereof, at any time before their retirement.
12. The XXXXXXXXXX TB will not be available to management employees hired after XXXXXXXXXX.
13. The Corporation's other unionized employees are represented by XXXXXXXXXX. Their existing contracts expire in XXXXXXXXXX and labour negotiations are not expected to begin until XXXXXXXXXX.
PROPOSED TRANSACTIONS
14. The Corporation proposes to amend the XXXXXXXXXX TB in the Union Group I contract so that the XXXXXXXXXX TB will be the same as that provided to management employees. Union Group 1 employees covered by that contract will no longer accrue any additional years under the XXXXXXXXXX TB. That is, these employees will be entitled to XXXXXXXXXX salary (or XXXXXXXXXX of that in the event of resignation) for each year and partial year of continuous eligible service up to XXXXXXXXXX only, subject to a maximum of XXXXXXXXXX in respect of retirement or death and XXXXXXXXXX in respect of resignation.
15. The Corporation also proposes to amend the XXXXXXXXXX TB so that these employees will be given a one-time opportunity to elect to accelerate the receipt of this retiring allowance by way of a single payment. If a Union Group I employee elects to receive his or her XXXXXXXXXX TB early, the amount paid will be based upon his or her basic pay as at XXXXXXXXXX. Union Group I employees who do not exercise this right will not be permitted to cash-in their XXXXXXXXXX TB, or any portion thereof, at any time before their retirement.
16. It is expected that the majority of the Corporation's affected employees will elect an early payment of their XXXXXXXXXX TB. Management employees who are electing will be required to elect in XXXXXXXXXX and, provided that a new contract agreement is reached in the near future, Union Group I employees who are electing will be required to do so by XXXXXXXXXX.
17. It is expected that payments will be made to management employees in XXXXXXXXXX and, provided that a new contract agreement is reached in the near future, to Union Group I employees by XXXXXXXXXX.
18. For management and Union Group I employees who do not exercise the right to accelerate the receipt of the XXXXXXXXXX TB, all of the existing rules of the XXXXXXXXXX TB relating to the timing and quantum of the XXXXXXXXXX TB will continue to apply. That is, as reflected in 11, these employees will not be permitted to cash-in their XXXXXXXXXX TB, or any portion thereof, at any time before their retirement. The XXXXXXXXXX TB payment will be made upon retirement, resignation or termination for cause and will continue to be based on such an employee's basic pay as of the date of termination of employment (with the proviso that years of service after XXXXXXXXXX will not be included in the calculation). The XXXXXXXXXX TB will continue to provide only XXXXXXXXXX of the XXXXXXXXXX TB amount otherwise computed is payable in the event of resignation and is further reduced or eliminated in the event of termination for cause.
PURPOSE OF PROPOSED TRANSACTIONS
19. The purpose of the XXXXXXXXXX TB was, and remains, to provide retirement benefits to employees and not to provide a means by which those employees could postpone tax in respect of salary or wages otherwise owing for services already rendered.
20. The purpose of the proposed amendments to the XXXXXXXXXX TB is to ensure that the Corporation is able to afford the increasing cost of providing employee benefit programs. The Corporation must ensure that it is able to continue to provide those benefits that are most highly valued by employees. The Corporation has conducted an extended review of all of its employee benefits programs. The recommendation of this review is that the XXXXXXXXXX TB is an increasingly significant liability to the Corporation, the escalating cost of which is disproportionate to its value to employees and the XXXXXXXXXX TB should therefore be amended as proposed above. XXXXXXXXXX.
21. The purpose of the proposed amendments is to allow the Corporation to discontinue the existing XXXXXXXXXX TB as a cost-cutting measure, while upholding its obligation to compensate those employees under existing contracts of employment. The purpose of the proposed amendments to the XXXXXXXXXX TB is not tax-related.
22. Management employees were notified in XXXXXXXXXX of the change to take effect with respect to the accumulation of years after XXXXXXXXXX in their XXXXXXXXXX TB calculation because, from an employment law perspective, it is prudent, if not required, to provide employees, a portion of whose compensation is being materially changed, adequate advance notice of that change in which to decide if they wish to continue their employment under the changed terms (or to treat their employment as having been ended and to seek redress). In addition, the period of time provides an opportunity for the affected employees to consider their financial choices and to seek financial advice on whether or not to elect to receive their XXXXXXXXXX TB payment early.
23. There are several reasons for those management employees electing early payout in XXXXXXXXXX to receive the payment in early XXXXXXXXXX. Firstly, the payment will be based on the employee's pay as of XXXXXXXXXX. This date was selected to coincide with the Corporation's fiscal year end and to provide employees with reasonable notice of the change to their benefit. It was also selected because it was administratively simpler to calculate XXXXXXXXXX TB payments based on a XXXXXXXXXX date. This is the case because regular annual pay increments are effective on XXXXXXXXXX but are implemented retroactively XXXXXXXXXX each year. In addition, if the elections are made in XXXXXXXXXX, a certain period of advance time for a special payroll to be processed is needed as a practical and logistical matter by the Human Resources and Payroll/Accounting Departments of the Corporation. Each employee's employment records must be examined to determine years of eligible service, etc. It is also anticipated that a number of employees may appeal the calculated amount of their payment. Time was built into the schedule to allow for this process. It is also expected that a number of employees will wish to have amounts transferred directly to their RRSPs (contribution room permitting) and time needs to also be allowed for the necessary communications and paperwork. Moreover, the Corporation is implementing a new payroll system on XXXXXXXXXX and sufficient lead time is required to ensure that the system will operate as designed.
24. The reasons for the Union Group I employees electing early payout in XXXXXXXXXX to receive payment by XXXXXXXXXX are similar to those noted in 23 above, however, as there are many more employees covered by this unionized group the time needed for payment to be made is expected to be longer.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, we rule as follows:
A. Amounts received by those management and Union Group I employees who elect to accelerate payment of the XXXXXXXXXX TB will be included in the income of those employees in the year of receipt by virtue of subsection 5(1).
B. For those management and Union Group I employees who do not elect to accelerate payment of the XXXXXXXXXX TB, the proposed amendments will not result in the XXXXXXXXXX TB constituting a salary deferral arrangement (an "SDA") as that term is defined in subsection 248(1) of the Act .
You had requested a ruling that the payment upon termination of employment of those management and Union Group I employees who did not elect to accelerate payment of the XXXXXXXXXX TB would qualify as a retiring allowance. As there is no proposed transaction concerning this request, we cannot provide a ruling. However, we are prepared to make the following comment. In our view, for those management and Union Group I employees who do not elect to accelerate payment of the XXXXXXXXXX TB, provided the payment upon termination before the amendments to the XXXXXXXXXX TB would have qualified as a retiring allowance as defined in subsection 248(1) of the Act, the amendments, in and of themselves, will not affect this such that a payment upon termination will continue to so qualify.
The above rulings which are based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 7-06R5 Advance Income Tax Rulings, dated May17, 2002, and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
.../cont'd
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