7 November 1996 External T.I. 9635515 - PAY IN LIEU OF NOTICE

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 allowance" or employment income.

Position:

Question of fact - referred to standard position on pay in lieu of notice and payments under Ontario Employment Standards Act.

Reasons:

Routine.

XXXXXXXXXX							963551

November 7, 1996

Dear XXXXXXXXXX:

Re: Amounts Received on Termination of Employment

This is in reply to your letter of October 17, 1996, which has been forwarded to us by the London Tax Services Office. You ask whether certain amounts due to you upon your voluntary termination of employment can be transferred on a tax-deferred basis to your registered retirement savings plan ("RRSP").

Your question relates to a proposed transaction and we are unable to confirm the tax consequences except in the context of an advance income tax ruling. We can provide the following general comments which are not binding on the Department.

The deduction for a transfer to an RRSP to which you refer is provided by paragraph 60(j.1) of the Income Tax Act (the "Act"). An individual who receives a "retiring allowance" in the year which is brought into income pursuant to subparagraph 56(1)(a)(ii) of the Act is entitled to a deduction for all or a portion of the amount transferred to the individual's RRSP in the year or within 60 days of the year end. The maximum amount of the retiring allowance eligible for this deduction is described in paragraph 60(j.1) and, for an individual who is a member of a pension plan or deferred profit sharing plan, is generally limited to $2000 for each pre-1996 year of employment with the employer who is paying the retiring allowance.

Your question relates to the issue of whether the amounts you are receiving on termination are retiring allowances or employment income. This determination can only be made after a review of the documents describing the reason for the payment of these amounts.

We would point out, however, that an amount which is paid in lieu of the salary which is due for the period of notice to which the individual is entitled under statute (for example, employment standards legislation) or under contract (for example, a collective agreement) is employment income. Please refer to paragraph 15 of the enclosed Interpretation Bulletin IT-365R2.

We do not know if this is relevant to your situation but advise that the Department has reviewed the Ontario Employment Standards Act and has taken the position that "termination pay" as described in section 57 of that statute is employment income since it is a payment made in lieu of salary for the period of notice. However, in our view "severance pay" as described in section 58 of Ontario Employment Standards Act is a retiring allowance.

The fact that an amount is received in instalments rather than as a lump sum is irrelevant to the issue of its character as a retiring allowance. In other words, an amount which is a retiring allowance will continue to be so treated for purposes of the Act even if it is received for a limited time on a bi-weekly basis after termination.

For a general discussion of retiring allowances please refer to the enclosed Interpretation Bulletin IT-337R2. We trust our comments will be of assistance to you.

Yours truly,

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

Enclosures