11 February 2000 External T.I. 1999-0014615 - RETIRING ALLOWANCE OR DEATH BENEFIT

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: 1) Is an amount paid to a deceased employee's spouse a retiring allowance or a death benefit? 2) If former employer participates in same pension plan as current employer but employee's service with former employer is not recognized under the pension plan, is the former employer considered a related employer for purposes of 60(j.1) of the Act?

Position: 1) Question of Fact 2) No

Reasons: 1) Where the employee was employed at the time of death then considered a death benefit, if not employed then considered a retiring allowance. 2) To be considered related, some or all of the service with the former employer has to be recognized in determining the retiree's pension benefits.

XXXXXXXXXX 1999-001461
M. P. Sarazin
Attention: XXXXXXXXXX

February 11, 2000

Dear Sirs:

Re: Retiring Allowances and Death of Employee

This is in response to your facsimile dated December 14, 1999, wherein you requested our comments regarding the treatment of certain amounts as retiring allowances in two situations.

In your letter you have outlined what appears to be actual fact situations related to completed transactions. We must advise you that the review of such transactions falls within the responsibility of tax services offices. However, we can provide you with the following general comments.

Situation 1

One of your employees was granted an exit payment and, as a long term employee, he was also eligible for a sick pay grant. The employee was receiving his sick pay grant as salary continuance payments to provide bridging until his official retirement date of XXXXXXXXXX. The employee passed away on XXXXXXXXXX and his wife was paid the balance of his sick pay grant as a death benefit. You would like to know whether the exit payment that would have been paid to the deceased employee will qualify as a retiring allowance when it is paid to the surviving spouse?

Comments

Paragraph 5 of Interpretation Bulletin IT-508R ("Death Benefits") states:

"If an employee ceased employment and was entitled to receive a retiring allowance but dies before the payment is made, the subsequent payment of the amount to a beneficiary of the deceased is included in the recipient's income under subparagraph 56(1)(a)(ii) as a retiring allowance. The tax treatment of a retiring allowance is discussed in the current version of Interpretation Bulletin IT-337, Retiring Allowances.

If an employee dies while still employed by the employer, and that employee was contractually entitled to receive a retiring allowance upon retirement, the severance pay received by a beneficiary of the deceased, on or after death of that employee, qualifies as the gross amount of a death benefit."

The determination of whether the amount to be paid to the surviving spouse qualifies as a retiring allowance or as a death benefit will depend on the relationship between the employee and the employer at the time of his death. In this regard, we would refer you to paragraph 4 of IT-337R3 wherein it states:

Whether an individual has retired is a question of fact. Continued participation in a former employer's health plan (for example, providing medical, dental and long term disability coverage) for a restricted period of time would not, in itself, indicate that the employment has not terminated, particularly if the employer's plan specifically permits former employees to be covered under the plan; however, if pension benefits continue to accrue to the individual the accrual indicates that there is an employment relationship, since such benefits only accrue to employees. The fact that the employer does not require an individual to report to work is not, by itself, determinative of whether the individual has retired. For example, an individual who has been given a leave of absence for educational purposes is still an employee. (emphasis added)

You will have to look at your particular situation to determine whether the deceased taxpayer was an employee at the time of his death. For example, if the deceased employee was accruing pension benefits under your pension plan at the time of his death, then the deceased employee would be considered an employee at the time of his death and the payment of the exit payment to the surviving spouse would constitute a death benefit for purposes of the Act.

Situation 2

An employee worked part-time for five years for XXXXXXXXXX. The employee then worked full-time for five years for XXXXXXXXXX. The employee left XXXXXXXXXX cashed-out his pension and rejoined XXXXXXXXXX and became a member of the pension plan with respect to his service with

XXXXXXXXXX. Both XXXXXXXXXX participate in the same pension plan After XXXXXXXXXX years of full-time service with XXXXXXXXXX, the employee has retired. You would like to know whether the five years of service with XXXXXXXXXX can be counted in determining the amount of retiring allowance that is eligible for rollover under paragraph 60(j.1) of the Act.

Comments

Paragraph 13(b)(ii) of IT-337R3 will provide your answer regarding the service with XXXXXXXXXX.

Paragraph 13(b)(ii) of IT-337R3 states that "a person related to the employer includes any previous employer of the retiree whose service therewith is recognized in determining the retiree's pension benefits". Even though XXXXXXXXXX and the former XXXXXXXXXX use the same pension plan, the two employers will not be considered related for purposes of paragraph 60(j.1) of the Act unless a period of the employee's service with XXXXXXXXXX is recognized in determining his benefits under that pension plan. Since this is not the case, and the two municipalities are not otherwise related, the five years of service with XXXXXXXXXX cannot be added to the total number of years of service for purposes of the paragraph 60(j.1) rollover.

We trust the above comments will be of assistance to you.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Legislation Branch