17 May 1999 External T.I. 9833895 - RETIRING ALLOWANCE - ACCRUING HEALTH BENEFITS

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 an employee has retired when subsequent consulting may occur and employee continues to receive health benefits.

Position:

Question of fact, but probably yes.

Reasons:

The Department will generally not consider that the employee and the employer had arranged, prior to the termination of employment, for the employee’s re-employment solely because the employee agrees to be available for consulting contracts subsequent to his retirement, if needed.

	Continued participation in a former employer’s health plan for a restricted period of time would not, in itself, indicate that employment has not been terminated
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P. -A. Sarrazin
May 17, 1999

Dear Sirs:

Re: Retiring allowance - accruing health benefits

This is in reply to your letter of December 23, 1998, addressed to Revenue Canada Source Deductions in Hamilton. Your letter was forwarded to our office for reply.

You requested our views as to whether certain employees are considered to have retired for the purposes of determining whether an amount qualifies as a retiring allowance. As you mentioned, all or part of a retiring allowance may be transferred to an RRSP by virtue of paragraph 60(j.1) of the Income Tax Act (“the Act”).

Our Comments

Whether an employee has retired is a question of fact which can only be determined after a review of all of the facts related to the particular situation. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request in accordance with Information Circular 70-6R3 (copy attached). Where the particular transactions are completed, the enquiry (including a request to appeal a decision of the Department) should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

A payment in recognition of long service or in respect of loss of an office or employment qualifies as a retiring allowance. This position is expressed in paragraph 5 of Interpretation Bulletin IT-337R3 (copy attached).

As stated in subparagraph 3(b) of IT-337R3, retirement or loss of office or employment does not include termination of employment with an employer, followed by re-employment with the former employer or employment with an “affiliate” of the former employer, when an arrangement was made prior to the termination of employment. The Department will generally not consider that the employee and the employer had arranged, prior to the termination of employment, for the employee’s re-employment solely because the employee agrees to be available on a consulting basis, if needed by the employer, subsequent to his or her retirement.

In addition, paragraph 4 of IT-337R3 states that continued participation in a former employer’s health plan for a restricted period of time would not, in itself, indicate that employment has not been terminated; however, if pension benefits continue to accrue to the individual the accrual indicates that there is an employment relationship, since such benefits can only accrue to employees.

Vacation pay and payments in lieu of earnings for the period of reasonable notice of termination are considered employment income and do not qualify as a retiring allowance. This is expressly stated in paragraph 7 of IT-337R3.

We also bring to your attention paragraph 8 of IT-337R3 which states the Department’s policy with respect to instalment payments. If an employee receives an amount that is a retiring allowance and, on or before the date that the employment is terminated, the employee chooses to have his or her retiring allowance paid in instalments, the instalments will be taxable only in the year received.

We trust that these comments will be of assistance.

Yours truly,

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

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