8 February 2000 Internal T.I. 2000-0004517 - TERMINATION OF EMPLOYMENT CONTRACT

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: Where an employment contract calls for payments for a 4 year period whether employment terminated or not, would payments related to the period subsequent to the termination qualify as a retiring allowance?

Position: Question of fact but probably not.

Reasons: Based on the limited facts, the payments appear to relate to the employment of the taxpayer and not the loss of office of the taxpayer.

									February 8, 2000

VANCOUVER TSO						HEADQUARTERS
André Villeneuve						M.P. Sarazin
Director 							(613) 824-5441

Attention: Edith Chmielnicki
									2000-000451

Amount Under Employment Contract Qualifying as a Retiring Allowance

We are writing to you in response to your facsimile dated January 26, 2000, wherein you requested our comments regarding a letter you received from an accounting firm requesting your opinion with respect to the taxation of payments to an individual pursuant to an employment contract.

A Canadian company ("Employer") recruited an individual ("Employee") who was a resident of the U.S. The Employer and the Employee entered into a four year term employment contract. In the event the Employee's employment is terminated, the terms of the employment contract provided for the following:

i) the Employer is required to fully discharge its obligations by payment to the Employee of all salary, exclusive of bonuses and benefits for the remainder of contract term;

ii) the Employer will reimburse the Employee for any health insurance premiums paid by the Employee for a period of six (6) months following such termination; and

iii) the Employee agrees that the damage caused to the Employee by such termination will not be irreparable or otherwise sufficient to entitle the Employee to injunctive or other equitable relief and that the Employee's rights and remedies in any such event will be strictly limited to the right, if any, to recover money damages in an action of law.

The Employee became a resident of Canada and commenced employment with the Employer. After 2 1/2 years, the Employer terminated the Employee's employment and is continuing to make the payments provided for under the employment contract. The Employee has returned to the U.S. and has made no contact with nor performed any services for the Employer since the termination of his or her employment.

The accounting firm has asked you to confirm that the payments described under i) above received subsequent to the Employee's termination represent a retiring allowance for purposes of the Income Tax Act (the "Act"), the Employer is only required to withhold 25% from the payments made to the Employee when he or she has relocated to the U.S. and the Employer will not be penalized under subsection 227(8.4) of the Act for failure to withhold sufficient taxes if the non-resident Employee is found to be liable for taxes under Part I of the Act.

Comments

In their letter, the accounting firm has outlined what appears to be an actual fact situation related to a past transaction. It is the practice of this directorate not to comment directly to the author of the letter with respect to such transactions when the identities of the taxpayers are not known. We will provide you with our views and you may consider our views in drafting your response to the accounting firm's letter.

The Canada Customs and Revenue Agency's (the "Agency") general views regarding retiring allowances are found in Interpretation Bulletin IT-337R3. Paragraph 7 of IT-337R3 deals with payments pursuant to contractual obligations and it states:

"The payment of an amount pursuant to a contractual obligation may, in some cases, be treated as a retiring allowance. A payment received upon or after retirement or in respect of a loss of employment pursuant to the terms of an employment contract with a former employer is generally viewed as remuneration from the former office or employment. However, in circumstances where the payment can reasonably be regarded as being in recognition of long service or as compensation for loss of office, it is considered to be a retiring allowance."

We note that the determination of whether a payment can reasonably be regarded as being compensation for loss of office is a question of fact that can only be determined after a review of all of the facts. In the above case, the determination would require a review of the particular employment contract, any correspondence and other information related to the hiring of the Employee and any correspondence and other information related to the termination of employment.

The Agency's general views with respect to payments made by an employer to employees can be found in IT-196R2. You will note that paragraphs 1 and 4(c) discuss amounts received under a contract of employment. Paragraph 1 states that subsection 6(3) of the Act provides that an amount received in satisfaction of an obligation arising out of an agreement made immediately before the period that the Employee was employed by the Employer is deemed, for the purposes of section 5 of the Act, to be remuneration for services rendered during the period of employment unless it can be established that the amount can reasonably be regarded as other than a payment described in paragraph 6(3)(c), (d) or (e) (basically a signing bonus, remuneration for services, or consideration for a covenant by the employee to do or not do something before or after termination). Based on the limited facts available, it would appear that subsection 6(3) of the Act would apply to the payments made by the Employer subsequent to the Employee's termination pursuant to the employment contract. Consequently, the amounts are deemed to be paid in respect of the employment services provided in Canada under the employment contract and are therefore not paid in respect of the Employee's loss of office. This conclusion is consistent with the example provided in paragraph 4(c) of IT-196R2.

With respect to the payments made to the Employee while resident in the U.S. subsequent to his or her termination, the payments are attributable to the Employee's services rendered in Canada for the Employer and, as such, the payments would be included in the Employee's income and subject to tax in Canada pursuant to subsection 2(3) of the Act. Therefore, the payments would be subject to the federal and provincial tax rates as applicable to the Employee.

We trust these comments will be helpful.

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