30 October 2003 External T.I. 2003-0028025 - RETIRING ALLOWANCE DELAYED

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Can a retiring allowance be paid to a former employee 8 years after the individual left employment?

Position: Yes

Reasons:

Definition of "retiring allowance" would not preclude this delay in payment.

XXXXXXXXXX
2003-002802
Renée Shields
(613) 948-5273
October 30, 2003

Dear XXXXXXXXXX:

Re: Payment of a Retiring Allowance

This is in response to Mr. XXXXXXXXXX's letter of March 19, 2003 addressed to the St. John's Taxation Centre, inquiring about the payment of a retiring allowance. Mr. XXXXXXXXXX has asked that a reply be provided directly to you. The Taxation Centre has forwarded his letter to the Income Tax Rulings Directorate for reply.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

The CCRA's general views regarding retiring allowances are contained in Interpretation Bulletin IT-337R3, entitled "Retiring Allowances". In IT-337R3's Summary, we state that a retiring allowance is an amount received on or after the retirement of an employee in recognition of long service or in respect of a loss of office or employment. Paragraph 2 of IT-337R3 provides the legal definition of retiring allowance in subsection 248(1) of the Income Tax Act (the "Act"). Whether an amount paid to an individual is properly characterized as a retiring allowance is a question of fact to be determined in the particular situation.

The question posed in Mr. XXXXXXXXXX's letter is whether a corporation can grant a retiring allowance to a former employee several years after the individual leaves employment. As indicated in paragraph 8 of IT-337R3, a retiring allowance may be paid in instalments provided the recipient makes this election prior to being entitled to demand payment of the amount. In this way, the receipt of the amount is delayed and is taxed to the former employee as the instalments are received. We have also previously opined that such instalments could be spread over an unrestricted period of time.

Accordingly, if a corporation does not decide to pay a retiring allowance until several years after an employee retires, the former employee has had no right to the amount until that time. The amount will be paid after the retirement of the employee as required by the definition. It is therefore our opinion that the delay in declaring and paying the amount would not, in and of itself, prevent the amount from qualifying as a retiring allowance.

However, it should be borne in mind that if an employee is entitled to salary or other remuneration but defers receipt of the amount (including a deferral until several years after retirement), the rules applicable to salary deferral arrangements might be applicable. Under these rules, the amount is taxable to the individual in the year in which the entitlement arose. A salary deferral arrangement may exist if it can be said that one of the main reasons for the deferral was to postpone the tax payable.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, C.A.

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