24 February 2004 External T.I. 2004-0060861E5 - Retirement allowance paid into a RCA

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.

Principal Issues:

Whether or not amounts paid as part of a severance package are retiring allowances. Are amounts paid to an RCA trust? When are the amounts taxable to the individual - at the time of payment to the trust or at the time of the payment by the trust to the individual?

Are amounts that are included under 56(1)(x) deductible under 60(j.1) and 146(5) and 146(5.1).

Position:

Yes, if they are treated as such for purposes of the statutes that we administer (CCP, EI) and are not salary/and/or wages, accrued vacation pay or pay in lieu of notice.

Yes, if the amounts are paid by the employer (or a by a person with whom the employer does not deal at arm's length) to another person in connection with benefits that are to be received on the loss of an office or employment of the taxpayer. Amounts are taxable at the time of payment by the RCA trust to the individual.

Yes

Reasons:

IT-337R4 and "retiring allowance" definition in 248(1).

RCA definition in 248(1) and 56(1)(x).

As limited by 60(j.1) and the unused RRSP deduction room. .

XXXXXXXXXX 						2004-006086
A. St-Amour, CA
February 24, 2004

Dear XXXXXXXXXX:

Re: Tax treatment of amounts paid into a Trust

This is in reply to your letter of December 9, 2003 addressed to the Toronto North Tax Services Office. They asked that we respond to you directly.

In your letter, you mentioned that, in reaching a negotiated settlement with the union regarding the proposed lay off of an employee, all parties agreed that severance payments would be made by you to an "in trust account". You have inquired whether the amounts are considered retiring allowance amounts and taxable to the employee at the time they are paid into the in trust account or if they are taxable at the time they are paid from the in trust account to the employee. You have also asked that we provide information on withholding requirements.

Retiring allowance

The Canada Revenue Agency's (hereafter "CRA") general views regarding retiring allowances are set out in Interpretation Bulletin IT-337R4, "Retiring Allowance". A copy can be obtained on our website at the following address: http://www.ccra-adrc.gc.ca/E/pub/tp/it337r4/README.html.

Whether or not a particular payment qualifies as a retiring allowance as this term is defined in subsection 248(1) of the Income Tax Act (hereafter the "Act") can be determined only after reviewing all the relevant facts.

A retiring allowance as defined in subsection 248(1) of the Act includes an amount received in respect of a loss of office or employment. A loss of office or employment usually refers to the elimination or expiration of a particular office or employment. In this context, the words "in respect of" have been held by the Courts to imply a connection between the loss of employment and the receipt, where the primary purpose of the receipt was compensation for the loss of employment.

We are of the view that where an individual continues to accrue benefits until a date that is subsequent to the date the individual ceases to report to work, the retirement or the loss of office or employment, can be considered to take place at the later date. If it can be shown that a payment is in respect of a loss of an office or employment, the payment will constitute a retiring allowance regardless of the fact that the individual's loss of office or employment may occur subsequent to the receipt of such payment.

We are also of the view that a retiring allowance will be denied, if an employer treats the instalments as income from employment for the purposes of computing Employment Insurance premiums and benefits, Canada Pension Plan accruals or eligible years of service under a registered pension plan.

Accordingly, a severance payment in respect of a loss of an office or employment which is treated consistently for purposes of the statutes that we administer and which does not include any payments for salary and/or wages, accrued vacation pay or pay in lieu of notice will be considered as a retiring allowance.

Constructive receipt

A retiring allowance is required to be included in an employee's income for the year that is the earlier of the year in which the retiring allowance is paid to the employee and the year the employee has constructively received payment thereof.

The determination of whether constructive receipt exists in a specific situation is a question of fact. The Agency's general views in respect of the concept of constructive receipt can be found in its response to question 13 at the CRA Round Table published in the 1984 Conference Report wherein it states:

"The Department considers an amount to have been received by an employee upon the earlier of the date upon which payment is made and the date upon which the employee has constructively received a payment. Constructive receipt is considered to occur in situations where an amount is credited to an employee's debt or account, set apart for the employee, or otherwise available to the employee without being subject to any restriction concerning its use."

It is our view that constructive receipt in a particular year would occur, for example, where the employee has access to the retiring allowance in the year but simply chooses to receive it in a later year. However, in a situation where the evidence discloses that the employee has no legal right to receive the retiring allowance in a particular year, the mere deposit by the employer of the retiring allowance into a trust, which was not under the direction of the employee but as a result of the agreement of both parties (the employer and employee), would not by itself result in entitlement to an amount or its constructive receipt (see James R. Crighton 91 DTC 511 (TCC)).

Whether or not an in trust account constitutes a trust in common law is a question of fact and law. As explained to you by Ms. St-Amour, we cannot make this determination in the context of a technical interpretation.

Retirement Compensation Arrangement (hereafter "RCA")

An RCA is defined in subsection 248(1) of the Act to include a plan or arrangement under which contributions are made by an employer or former employer of a taxpayer or by a person with whom the employer or former employer does not deal at arm's length, to another person (referred to as a custodian) in connection with benefits that are to be or may be received or enjoyed by any person on, after or in contemplation of any substantial change in the services rendered by the taxpayer, the retirement of the taxpayer or the loss of an office or employment of the taxpayer other than certain excluded arrangements.

Accordingly, where an employer pays retiring allowance amounts to a third party (e.g. a trust) in connection with benefits that are to be paid to an employee for the loss of an office or employment by the employee, such an arrangement would constitute an RCA as defined in subsection 248(1) of the Act.

The provisions of Part XI.3 of the Act would apply and the employer would be required to withhold 50% of the contribution pursuant to paragraph 153(1)(p) of the Act and subsection 103(7) of the Income Tax Regulations. However, this special tax is refundable as the benefits are received by the employee.

Upon receipts of such amounts, the RCA beneficiary is taxable pursuant to paragraph 56(1)(x) of the Act.

Detailed explanations of the various responsibilities of the employer and custodian and the calculation of Part XI.3 refundable tax are found in the CRA's publication entitled "Retirement Compensation Arrangements Guide"(T4041). A copy of this guide can be obtained on our website at: http://www.ccra-adrc.gc.ca/E/pub/tg/t4041/README.html.

Transfer to a Registered Retirement Savings Plan (hereafter "RRSP")

Paragraph 60(j.1) of the Act allows a deduction in computing a taxpayer's income for a taxation year an amount that is paid to the taxpayer under an RCA to which the employer has contributed, as a retiring allowance and included in computing the taxpayer's income for the year by virtue of paragraph 56(1)(x) of the Act. Subject to the limitations in subparagraph 60(j.1)(ii) of the Act, an employee or former employee can transfer a retiring allowance to an RRSP under which the employee or former employee is the annuitant. You can refer to paragraphs 19 to 22 of IT-337R4 for an example of the calculation of the limits.

In addition, if the employee has unused RRSP deduction room, an amount received as a retiring allowance may be contributed to either the recipient's RRSP or to a spousal or common-law partner RRSP in accordance with paragraphs 146(5) and 146(5.1) of the Act, respectively, up to a maximum of that room. For more information, see the current version of the guide entitled RRSPs and Other Registered Plans for Retirement (T4040) on our Website at http://www.ccra-adrc.gc.ca/E/pub/tg/t4040/README.html.

Withholding requirements on a person paying a retiring allowance to a recipient are mentioned in paragraph 25 of IT-337R4. This paragraph states that a person paying a retiring allowance to a recipient is required to withhold tax pursuant to paragraph 153(1)(c) of the Act. However, if the retiring allowance is paid directly to an RRSP there is no requirement for the payer to withhold income tax on the transferred amount if the payer has reasonable grounds to believe the transfer is within the deduction limits under paragraph 60(j.1) or can be deducted pursuant to subsections 146(5) or (5.1) of the Act.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Agency.

Yours truly,

for the Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch