5 May 1994 Internal T.I. 9411720 - PAYMENT OF RETIRING ALLOWANCE IN INSTALMENTS

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:

Whether certain amounts are "retiring allowances"; whether receipt of certain employment benefits indicates employment relationship continued; accounting for instalments of retiring allowance on T4A for purposes of deduction of "eligible amount" under 60(j.1)

Position TAKEN:

Routine on continuing employment benefits may taint the retiring allowance; reiterated Source Deductions position on accounting for instalments of retiring allowance.

Reasons FOR POSITION TAKEN:

Routine.

CANADIAN PAYROLL ASSOCIATION

1994 NATIONAL CONFERENCE
Termination Forum

Question 1

We terminated an employee and continued him on salary for 18 months. Each bi-weekly pay period a cheque was produced and the employee advised how much to transfer to his RRSP, based on the rules for a retiring allowance. Since these payments spanned 3 different calendar years, a T4A was produced each year.

How would you report the non-eligible amount in this case?

Answer 1

Where employment is terminated an amount paid in respect of the loss of employment is a "retiring allowance" within the definition in subsection 248(1) of the Act. "Salary continuance" payments may represent the payment of a retiring allowance in instalments. Where regular employment benefits continue, however, the Department may consider that the employment relationship has not been terminated and that the payments are actually regular salary or wages and taxable as such. This is so even where the employee is not required to report to work. In particular, pension benefits can only accrue to persons who are employees and, therefore, their presence indicates that there is an employment relationship. If the employer has entered into an approved downsizing program in accordance with section 8505 of the Income Tax Regulations, however, the awarding of additional lifetime retirement benefits under the pension plan will not, in itself, be regarded as an indication of continued employment.

If the employee has been terminated and the retiring allowance is being paid in instalments (and is not being paid out of a retirement compensation arrangement), the amount of the retiring allowance may be deducted from income in accordance with paragraph 60(j.1) of the Act if it:

1.is included in income for the year under subparagraph 56(1)(a)(ii) of the Act;

2.is designated by the recipient in the income tax return for the year;

3.(in the case where the recipient was a member of the employer's pension or deferred profit sharing plan) does not exceed the amount by which $2000 times the number of years employed exceeds all amounts deducted under paragraph 60(j.1) in the year or in previous years with respect to amounts paid by the same employer; and

4.does not exceed the amount paid by the recipient to the RRSP in the year or within 60 days thereof, and only to the extent that it was not deducted in computing the recipient's income for a preceding taxation year.

Therefore, if the retiring allowance is paid in instalments over a number of years, the recipient is not prohibited from designating an amount in accordance with 2 above in any or all of the years the instalments are included in income, so long as the total amount designated does not exceed the amounts calculated in 3 and 4 above. For example, if the recipient will be receiving $60,000 in instalments of $15,000 in each of the next four years and the amount eligible for transfer to an RRSP under paragraph 60(j.1) is $40,000, the recipient may designate $10,000 of the $15,000 in each year, or any amount in any or all of the four years, so long as the total transferred to the RRSP('s) and deducted under paragraph 60(j.1) does not exceed $40,000.

(Source Deductions position: In the above situation, the amounts will be reported as follows: Unlike the instructions for single retiring allowance payments on page 6-17 of the new "Employers' Guide to Payroll Deductions", when retiring alowances are being paid out over a number of years, the employer should enter in Box 26 the amount of retiring allowance paid in the year ($15,000). The employer should also enter code 12 and indicate each year in the "Footnote" area of the T4A Supplementary "Total Retiring Allowance $60,000, Eligible Amount $40,000, Non-eligible $20,000.)

Prepared by: P. Spice
May 5, 1994