21 February 1996 External T.I. 9532325 - RETIRING ALLOWANCE - PERSON RELATED TO EMPLOYER

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 corporation without share capital can be related to federal government.

Position:

1)Yes, if federal crown has ability to appoint majority of members or board of directors;

2)otherwise through crown agent status, acquisition of continuation of corporation's business by government or pension plan recognition.

Reasons:

1)De jure control is with the owners of the majority of the voting shares - if corporation incorporated without share capital, logic dictates control resides with person who can elect or appoint majority of directors or trustees;

2)routine.

Industry Canada
C.D. Howe Building, Room 257G
235 Queen Street 953232
Ottawa, Ontario P. Spice
K1A 0H5

Attention: Mr. Leo Major

February 21, 1996

Re: Person Related to the Employer for Purposes of Paragraph 60(j.1) of the Income Tax Act

This is in reply to your letter of October 31, 1995, which has been forwarded to us by the Source Deductions Division of the Department. You enclosed copies of correspondence and documents concerning a dispute over the calculation of the eligible amount of a retiring allowance as set out in paragraph 60(j.1) of the Income Tax Act (the "Act"). The issue is whether an employee's years of service with XXXXXXXXXX could be considered employment with an employer related to the Federal Government.

Your query relates to a proposed transaction and we are therefore precluded from providing specific advice thereto except in the context of an advance income tax ruling. We can provide the following general comments which, however, are not binding on the Department.

Paragraph 60(j.1) of the Act provides a deduction from income with respect to an amount of a retiring allowance which is received in the year and brought into income pursuant to subparagraph 56(1)(a)(ii) of the Act. The deduction is available with respect to all or a portion of the amount contributed to a registered retirement savings plan or registered pension plan by the employee in the year or within 60 days of the end of the year. The maximum deduction is the product of certain dollar amounts (not in issue here) and the number of years before 1996 during which the employee is employed by the employer or by "a person related to the employer".

Subsection 251(2) of the Act states that a corporation is related to the person who controls the corporation. In this context "control" means de jure control. Therefore, if Her Majesty In Right of Canada has more than 50% of the voting shares of a corporation, that corporation is related and those years of service could be counted in determining the amount of a retiring allowance paid to a federal public servant which would be eligible for the deduction under paragraph 60(j.1) of the Act.

Where the corporation in question is incorporated without share capital, we are of the view that the principles in King George Hotels Limited v. M.N.R. 68 DTC 635 and HSC Research Development Corporation v. The Queen 95 DTC 225 may be applicable. Thus, if the majority of the members of the corporation or the board of directors is appointed by Her Majesty in Right of Canada, then the corporation would be considered to be controlled by, and therefore related to, Her Majesty in Right of Canada.

Additionally, if a corporation is an agent of Her Majesty in Right of Canada, the Department accepts that the corporation is a related person for purposes of paragraph 60(j.1) of the Act. Enclosed is ATR-63 ("Donations to Agents of the Crown") which explains how an entity can be recognized as an agent of Her Majesty in right of a province - see in particular the first two paragraphs under the heading "Law and Analysis". Although the comments refer to agents of the provincial Crown, they are relevant for purposes of determining agency status vis-a-vis the federal Crown.

Lastly, the extended definition of "person related to the employer" in subparagraphs 60(j.1)(iv) and (v) of the Act may apply. If the federal government acquired or continued the corporation's business, the two employers will be considered related for purposes of the paragraph 60(j.i) deduction. There is not sufficient information on file to make the determination. And as Mr. Cousineau of the Source Deductions Division advised you, a person related to the employer includes a former employer if any period of service with that former employer is recognized in determining benefits under the current employer's pension plan.

We trust the foregoing comments will assist.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c.: Ms Barb Laroque
Trust Accounts Division
Room 7000 Cumberland Place