8 November 1985 Income Tax Severed Letter A-1982 - [Retiring Allowance Paid to U.S. Resident]

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.

November 8, 1985

A-1982 R.A. Primeau

Re: Retiring Allowance paid to U.S. Resident

This is in reply to your letter of October 17, 1985 and further to our discussions regarding the above-captioned subject matter.

The facts, as you have outlined them to us, are that a Canadian resident corporation (the "Corporation") will make a payment to a U.S. resident former employee (the "Employee") in settlement of the Employee's action for damages for wrongful dismissal. The settlement payment agreed to by the parties will consist of:

(a) reimbursement of the Employee's legal expenses,

(b) reimbursement of litigation expenses incurred by the Employee,

(c) pre-judgment interest running from the date of the writ to the date of settlement, and

(d) damages for alleged failure to give adequate notice (equal to the remuneration the Employee would have received if the alleged adequate notice had been given).

As you have pointed out, element (d) of the settlement payment clearly falls within the definition of "retiring allowance" contained in subsection 248(1) of the Income Tax Act (the "Act"). It is our position that elements (a) and (b) of the settlement payment also for a part of the retiring allowance because the words "in respect of a loss of an office or employment" in the subsection 248(1) definition are broad enough to include such elements.

In our view, the rate at which Part XIII tax should be withheld from elements (a), (b) and (d) of the settlement payment is 152 if the payment is made in 1985 and 252 thereafter. That is, we agree with your line of reasoning, as follows:

1) A retiring allowance is subject to a 25% withholding rate under paragraph 212(1)(J.1) of the Act unless this rate is reduced by the relevant tax treaty, if any.

2) As there is no provision dealing specifically with a retiring allowance in the Canada U.S. Income Tax Convention (1980) (the "new treaty"), Article XXXXII thereof permits the full operation of paragraph 212(1)(j.1) including the rate specified therein.

3) As provided in Article XXXX(2)(b) thereof, the new treaty has effect with respect to a payment of a retiring allowance made in a taxable year beginning on or after January 1, 1985. This notwithstanding, Article XXXX(5) of the new treaty provides that any greater relief that would have been afforded by the Canada U.S. Income Tax Convention (1942) (the "old treaty") will continue to have effect for the first taxable year covered by Article XXXX(2)(b).

4) Article XI of the old treaty would in fact have afforded such greater relief to elements (a), (b) and (d) of the settlement payment because such elements are not "earned income" as referred to in that Article and thus the Part XIII tax rate would have been limited to 152.

Therefore the 25% rate will not apply for elements (a), (b) and (d) unless the settlement payment is made after 1985.

The following statement taken from paragraph 12 of IT-396R Indicates the treatment that should be given to element (c) of the settlement payment:

"It is the Department's position that where, after 1983, an award for damages is made either by a court or by means of an out-of-court settlement which includes, or is augmented by, an amount stated, either by the court or in the terms of the settlement, to be in fact interest on all or a portion of the award, such amount will constitute interest income in the hands of the recipient thereof for all purposes of the Act. This position arises from the fact that a liability for damages is considered to originate an the date on which an injury occurred and there is therefore an amount owing to, or belonging to, the injured party from that date. It is immaterial that the amount owing was not determinable until a later date because once the right to receive damages has been established, that right exists from the time at which the injury giving rise to those damages occurred."

Accordingly, Part XIII tax should be withheld from element (c) of the settlement payment at the rate of 152 by virtue of Article XI of the new treaty. This would apply whether the payment is made in 1985 or thereafter because the old treaty provides no greater relief for this income.

We trust that the above comments will assist you in this matter.

Yours truly,

ORIGINAL SIGNED BY Wm. R. McColm for Director Non-Corporate Rulings Division

212(1) (j.1), 248(1)"r" Can-U.S. Treaty (New), Arts. XI, XXXXII, XXXX Can-U.S. Treaty (Old), Art. XI