10 August 2000 External T.I. 2000-0024275 - LIEU OF NOTICE, 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: Would a certain payment or part of the payment paid to laid-off employees qualify as a retiring allowance for purposes of the Act?

Position: Yes.

Reasons: The portion of the payment that exceeds the notice period required under the employment contract (including the Employment Standards Act of Ontario) would qualify as a retiring allowance for purposes of the Act.

XXXXXXXXXX 								2000-002427
M. P. Sarazin
Attention: XXXXXXXXXX 

August 10, 2000

Dear Sir\Madam:

Re: Pay in Lieu of Notice and Retiring Allowance

This is in response to your letter of April 26, 2000, in which you asked whether certain payments made by XXXXXXXXXX (the "Employer") between XXXXXXXXXX qualify as a retiring allowance for purposes of the Income Tax Act (the "Act").

Decisions in Ontario have confirmed that employees subject to the Employment Standards Act of Ontario (the "ESAO") may be entitled to two separate types of benefits. Such employees are entitled to notice under section 57 of the ESAO, or to the wages that would have been paid during the notice period. Certain employees may also qualify for severance pay under section 58 of the ESAO.

The Employer was forced to lay-off some of its employees and contract workers. The Employer's standard employment policy was to provide one week's notice plus a lump sum payment that in all cases exceeded the minimum amount required to be paid under section 57 of the ESAO. The Employer did not break down the lump-sum payment to indicate what it represented. The Employer is of the view that the full amount of the lump sum payment is a retiring allowance for purpose of the Act.

Comments

In your letter you have outlined actual fact situations related to completed transactions. As noted in Information Circular 70-6R3 (available at your local tax services office or on the internet at www.ccra-adrc.gc.ca/formspubs/menu-e.html), this directorate can only provide advance income tax rulings in respect of specific proposed transactions. We must advise you that the review of completed transactions falls within the responsibility of the relevant tax services offices. Consequently, we can only provide you with the following general comments.

The determination of whether a lump-sum amount or a portion of the lump-sum amount paid to an employee on termination of employment constitutes "pay in lieu of notice" or a "retiring allowance" is a question of fact that can only be determined after all of the facts pertaining to each particular case have been reviewed.

Where an employee's employment is to be terminated, the employment contract (including the applicable statutes and terms implied by the courts under common law) may require that the employee's employment be continued for a certain period known as the "notice period" prior to termination. However, in lieu of continuing the employee's employment for the notice period, the employer may pay the employee's normal wages for the notice period in a lump-sum and terminate the employee's employment as of that time. With respect to the notice period required for termination of employment under provincial employment or labour standards laws, Canada Customs and Revenue Agency (the "Agency") treats payments in lieu of such notice as employment income. The Agency has confirmed this view in paragraph 4 of Interpretation Bulletin IT-196R2 (Payments by Employer to Employee), paragraph 7 of IT-337R3 (Retiring Allowances) and paragraph 15 of IT-365R2 (Damages, Settlement, and Similar Receipts).

Consequently, a payment in lieu of earnings for the period of reasonable notice which is made by virtue of the terms of an employment contract (whether explicit or implied) will be treated as employment income and not as a retiring allowance; such a payment can be distinguished from a payment in respect of loss of employment by reason of the purpose of the payment. The purpose of a payment in lieu of earnings is to replace earnings which would otherwise have been earned under the contract of employment while a payment in respect of loss of employment is intended to compensate the employee for that loss.

Retiring allowance is defined in subsection 248(1) of the Act to mean an amount received on or after retirement from an office or employment in recognition of long service or in respect of a loss of office or employment. Consequently, any severance pay (i.e., an amount received upon or after retirement in recognition of long service, or paid in respect of a loss of office or employment) over and above the amount that represents pay in lieu of notice, would generally be considered a retiring allowance.

We trust the above comments will be helpful.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate