28 November 1996 External T.I. 9638405 - PAYMENT OF SICK LEAVE CREDITS BEFORE TERMINATION

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 lump sum payment of sick leave credits in advance of loss of employment can be a retiring allowance.

Position:

Yes.

Reasons:

A payment "in respect of a loss of an office or employment" is not required by the words of the definition to be paid after the loss.

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Attention: XXXXXXXXXX

November 28, 1996

Re: Sick Leave Pay-Out Prior to Termination

This is in reply to your facsimile transmission of November 19, 1996, in which you describe a proposed lump sum payment of accumulated sick leave hours to an employee who will no longer report to work but who will receive salary continuance payments for 6 to 18 months after payment of the accumulated sick leave. You ask whether the payment of accumulated sick leave would be a "retiring allowance" as defined in subsection 248(1) of the Income Tax Act (the Act").

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

As set out in paragraph 5 of Interpretation Bulletin IT-337R2, the Department recognizes that a payment in respect of a loss of employment which constitutes the employee's unused sick leave credits qualifies as a retiring allowance.

Furthermore, a payment "in respect of a loss of an office or employment" is not required by the terms of the definition of "retiring allowance" in subsection 248(1) of the Act to be made after the loss. Therefore, it is our view that if it can be shown that the payment is in respect of the loss, it is irrelevant that the loss (i.e. of the employment, including the end of all significant employment benefits such as salary continuance and pension benefit accruals) will occur in future. However, for a payment in advance of the loss to be considered a "retiring allowance" there must be evidence that the loss is not speculative or contingent and that the severing of the employment relationship including the cessation of all employment benefits will occur.

Note that if the accumulated sick leave is actually taken, the amounts received will not, of course, be considered a retiring allowance but will constitute employment income.

If the amount received is a "retiring allowance", the deduction described in paragraph 60(j.1) of the Act will be available to the extent permitted therein whether the "retiring allowance" was received prior to, on, or after the loss of the employment. 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