16 December 1994 External T.I. 9411785 - RETIRING ALLOWANCE

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:

What is the tax treatment of termination payment to an employee in respect of his common law entitlement to pay in lieu of notice?

Position TAKEN:

Question of facts. Our position in respect of damages awarded by a tribunal and settlement is under review.

See position paper (941225).

Reasons FOR POSITION TAKEN:

			5-941178

XXXXXXXXXX R. Gagnon

Attention: XXXXXXXXXX

December 16, 1994

Dear Sirs:

Re: Payments on Termination of Employment

This is in reply to your letter of April 27, 1994 wherein you requested clarification of the Department's administrative position concerning the tax treatment of payments on termination of employment in certain circumstances. We apologize for the delay in replying.

Whether or not a particular payment qualifies as a retiring allowance is a question of fact and it is thus not possible to give a definite reply other than on a case-by-case basis. If you have a specific situation in mind involving a proposed transaction, we are prepared to consider the matter further where the transaction is the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where a completed transaction is involved, the enquiry should be addressed to the relevant District Office. However, we can offer you the following general comments which may be of assistance to you.

It is the Department's position that where there is a termination agreement between an employer and an employee in respect of the termination of the employee which provides explicitly that a payment is made in lieu of a period of reasonable notice, the payment is taxable as employment income under subsection 5(1) of the Income Tax Act ("Act").

A payment is also taxable as employment income where the parties to an agreement agree that a payment shall be equal to equivalent salary for a determined period with termination to take effect immediately and the employee's employment benefits shall continue for the determined period.

Our position in respect of damages for wrongful dismissal awarded by a tribunal or settlement amounts where a wrongful dismissal action is settled prior to the court hearing, that are based on a reasonable period of notice in the circumstances, is being reviewed. Accordingly, any comment on the tax treatment of such payments would be inappropriate at this time. We will advise you of our positions as soon as our study is completed.

The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch