1999 Ruling 9912903 - LOSS OF OFFICE OR EMPLOYMENT

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:

Are "Termination Allowances and "Quarterly Installments" as those terms are defined in the ruling letter retiring allowances?

Position:

Termination Allowances are, Quarterly Installments are not.

Reasons:

The first type of payment is paid as a result of the loss of employment with the employer. The second payment is conditional on acceptance of an employment.

xxxxxxxxxx
xxxxxxxxxx 991290
xxxxxxxxxx

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Proposed Retiring Allowance
Advance IncomeTax Ruling

This is in reply to your letters of XXXXXXXXXX, in respect of the above noted advance income tax ruling. We also acknowledge the numerous telephone conversations on this file (XXXXXXXXXX).

Definitions and Abbreviations

In this letter, the following terms have the meanings specified:

(a) “Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;

(b) "Employees" means the XXXXXXXXXX employees of the Employer who will receive XXXXXXXXXX packages (described in paragraphs 11 and 12 below) XXXXXXXXXX;

(c) "Employer"means XXXXXXXXXX,

Head office located in XXXXXXXXXX,
Business number XXXXXXXXXX,
XXXXXXXXXX Tax Services Office
XXXXXXXXXX Taxation Centre;

(d) "Holdco" means XXXXXXXXXX;

(e) "Newco" means XXXXXXXXXX;

(f) "RRSP" means a registered retirement savings plan.

Relevant Facts

1. XXXXXXXXXX. The Employer is a "public corporation" and a "taxable Canadian corporation" as those terms are defined in subsection 89(1) of the Act. It is also a "subsidiary controlled corporation" of XXXXXXXXXX as defined in subsection 248(1) of the Act. XXXXXXXXXX.

2.

XXXXXXXXXX.

3. Newco is a "taxable Canadian corporation" as defined in subsection 89(1) of the Act with authorized share capital consisting only of common shares. Newcb is jointly owned by the Employer and Holdco. For purposes of the Act, the Employer and Holdco are not related.

4. The Employer has and will contribute cash and assets related to the XXXXXXXXXX business to Newco in exchange for the issuance of common shares of Newco. Holdco has and will contribute cash and assets to Newco in exchange for the issuance of a convertible debenture and common shares of Newco. The contribution ratio is XXXXXXXXXX% Employer and XXXXXXXXXX% Holdco.

5.

XXXXXXXXXX.

6. On XXXXXXXXXX, Newco issued convertible debentures which mature and are due and payable on XXXXXXXXXX, to Holdco. On maturity the debentures will automatically be repaid to Holdco by the issuance of common shares of Newco. Prior to maturity, the debentures can be converted into common shares of Newco at the Employer's sole option. Upon conversion of the debentures the Employer's percentage of total voting shares will be reduced from XXXXXXXXXX% to XXXXXXXXXX%.

7. XXXXXXXXXX. As at XXXXXXXXXX (assuming there is no conversion of the debentures prior to that time) and at the time of conversion of the debentures, the shareholders' ownership positions will be as follows:

Employer Holdco Total

Percentage of common shares XXXXX% XXXXX% XXXXXX%

(XXXXXXX)
Percentage of common shares XXXXX% XXXXX% XXXXXX%
(at the time of conversion of the debentures)

8. At all times prior to conversion of the debentures, Newco's Board of Directors will comprise XXXXXXXXXX representatives of the Employer and XXXXXXXXXX representatives of Holdco. Subsequent to any conversion, Holdco will have XXXXXXXXXX representatives on the Board and the Employer will have XXXXXXXXXX.

9. On XXXXXXXXXX, the Employer and Holdco entered into a unanimous shareholders' agreement (the "Agreement") pursuant to which all major decisions will require the unanimous consent of the XXXXXXXXXX shareholders. A copy of the Agreement was provided. The terms of the Agreement have always been the same regardless of the Employer's proposed ownership position in Newco.

10.

XXXXXXXXXX

11. On XXXXXXXXXX, the Employer and XXXXXXXXXX signed a memorandum of agreement setting out transition arrangements for Employees. XXXXXXXXXX.

12. The more relevant terms of the XXXXXXXXXX are as follows:

(a) XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

(b) XXXXXXXXXX

(c) XXXXXXXXXX

(d) XXXXXXXXXX

13.

XXXXXXXXXX.

14. Termination Allowances will only be paid to Employees under the terms of the XXXXXXXXXX after the Employee has ceased employment with the Employer.

Proposed Transactions

15. The Employer proposes to fulfill its obligations under the XXXXXXXXXX and in so doing pay the Termination Allowances and Quarterly Installments described in paragraph 12 above.

Purpose of the Proposed Transaction

16. The purpose of the proposed transactions is to offer terminated Employees of the Employer a separation package to recognize that employees are being terminated by the Employer and to fulfill the Employer's contractual obligations to pay such amounts.

Additional Information

17. To the best of your knowledge and that of the Employer the issues related to this request:

(a) have not previously been reported in the Employer's, or any related party's prior income tax returns;

(b) are not being considered by a tax services office in connection with any of the Employer's or any related party's prior income tax returns;

(c) are not under objection by the Employer or by any related person;

(d) are not before the courts or if a judgement has been issued, the time limit for appeal to a higher court has expired; and

(e) are not the subject of a ruling previously issued by this Directorate.

Ruling

Provided the above statement of relevant facts and proposed transactions are accurate and constitute a complete disclosure of all relevant facts and provided the transactions are completed as proposed, we rule as follows:

A Termination Allowance paid by the Employer to an Employee under the provisions of the XXXXXXXXXX as described above will constitute a “retiring allowance" as that term is defined in subsection 248(1) of the Act.

Additional Comments

This letter does not express or imply and should not be construed as expressing or implying any ruling other than that specifically provided above.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and is binding on Revenue Canada provided the proposed transactions are implemented on or before XXXXXXXXXX.

Yours truly,

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