21 November 1996 External T.I. 9635095 - RETIRING ALLOWANCE INSTALMENT PAYMENT

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:

Payment of a retiring allowance in the year following termination.

Position:

As long as this mode of payment was agreed to by the parties prior to termination it would be in accordance with the Income Tax Act.

Reasons:

Routine

									5-963509
XXXXXXXXXX							Franklyn S. Gillman

Attention: XXXXXXXXXX

November 21, 1996

Dear Sirs:

Re: Retiring Allowance

This is in reply to your letter dated October 24, 1996 wherein you requested clarification of the income tax implications of paying a retiring allowance to a terminated employee in the calendar year following the year of termination.

As stated in your above mentioned letter and in a telephone conversation of October 29, 1996 (XXXXXXXXXX/Gillman), your enquiry refers to specific taxpayers involved in proposed transactions. Written confirmation of the tax implications of proposed transactions are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R2.

However, we offer the following general comments:

Subsection 248(1) of the Act defines "retiring allowance" as follows:

" `retiring allowance' means an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received

(a)on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or

(b)in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal,

by the taxpayer or, after the taxpayer's death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer;"

Therefore, 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.

A payment received on termination of an office or an employment, whether in a lump sum or on a periodic basis, is often capable of being characterized as both employment income and a retiring allowance. The distinction the Department makes between the two types of payments relies on the purpose for the payment - does the amount represent salary due under the contract of employment or rather compensation for the loss of employment?

It is the Department's position that where it is agreed to by the parties or where the employment contract permits payment of a retiring allowance in instalments or in a lump sum at a future period in time, at the employee's option and the option is exercised, the instalments or lump sum payment would be taxable when received. However, this would only be the case where it was agreed to or the option was exercised on or before termination of employment. Furthermore, it is our view that it is not necessary that the instalments be equal in amount, but any option to select the amount of each instalment must be exercised at the time of retirement or termination of employment and be irrevocable.

If, however, the agreement between the parties provides that a lump sum retiring allowance will be paid on or after termination of employment and no provision for payment is contained in the terms of the program, the full amount is taxable in the year it is due. Taxation of the full amount cannot be deferred by any accommodation by the employer to spread the payment over a number of years.

With respect to the deductibility, for the employer, of an amount payable to an employee as a retiring allowance, it is subject to the general provision concerning the deduction of an expense made or incurred for the purpose of gaining or producing business income, if it is reasonable, as provided in section 67 of the Act. Thus, the amount payable to the employee must be reasonable in the circumstances considering the employee's length of service, the relationship of the amount of the retiring allowance to the remuneration received for the years of service and the value of the pension and other retirement benefits to which the employee is entitled in respect of the service.

These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case. As stated in paragraph 21 of Information Circular 70-6R2 written opinions are not advance rulings and, accordingly, are not binding on the Department.

We trust these comments will be of assistance.

Yours truly,

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