16 February 2000 External T.I. 1999-0015925 - PARTNER RETIRING ALLOWANCE

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: Can a partnership pay a retiring allowance to a retiring partner who used to be an employee?

Position: Question of fact.

Reasons: Generally admission to partnership is reward for previous service but there may be limited situations where a payment may be considered a retiring allowance in recognition of the partner's previous service as an employee.

XXXXXXXXXX 1999-001592
M. P. Sarazin
Attention: XXXXXXXXXX

February 16, 2000

Dear Sirs:

Re: Retiring Allowance Paid to Retired Partner

This is in response to your letter dated December 23, 1999, wherein you requested our comments regarding the payment of a retiring allowance by a partnership to a retired partner.

An individual was an employee of a professional firm for ten years before being admitted to partnership. After thirty years of being an active partner, the individual retires from the partnership. As part of the retirement package, the individual receives both a lump sum payment of $20,000 and fixed monthly retirement payments from the partnership. The individual remains a member of the partnership in order to ensure that the monthly retirement payments are treated as distributions of partnership income. You want to know whether the lump sum payment would constitute a retiring allowance for purposes of the Income Tax Act (the "Act").

In your letter you have outlined what appears to be an actual fact situation related to a past transaction. We must advise you that the review of such transactions falls within the responsibility of tax services offices and it is the practice of this Directorate not to comment on such transactions when the identities of the taxpayers are not known. Therefore, we can only provide you with general comments which are not binding on the Department and which may or may not be relevant to your specific fact situation.

The question of whether a payment made by a partnership to a former partner is a retiring allowance as defined in subsection 248(1) of the Act can only be determined after a review of all of the facts relating to the particular payment. We note that a partner is not an employee of the partnership and, generally, the employee's admission to partnership is considered to be his or her reward for previous service provided to the partnership. Consequently, we are of the view that there are few situations where all of the factors would support a conclusion that the payment to a former partner by a partnership would be in recognition of the former partner's long service as an employee of the partnership thereby allowing the payment to qualify as a retiring allowance. The factors that we would consider in determining whether a payment would qualify as a retiring allowance include, without limiting the generality of the foregoing, the partnership's general policy with respect to the payment of retiring allowances to employees that do not become partners, the partnership agreement, the legal entitlement of the former partner to the amount, the length of service as an employee, the former partner's remuneration while an employee and the withdrawal agreement.

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