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: Whether the employees of a municipality can receive a retiring allowance (for purposes of paragraph 60(j.1)) prior to the merger of the municipality with several other municipalities to create a new city ("New City")?
Position: No.
Reasons: The employees will not lose their office or employment by virtue of the merger since New City will be an affiliate of the predecessor municipalities.
XXXXXXXXXX 2000-005315
G. Kauppinen
November 14, 2000
Dear XXXXXXXXXX :
Re: Unused sick leave credits paid out before merger of municipalities
This is in reply to your facsimile transmission, dated October 26, 2000, attaching a copy of your letter to the XXXXXXXXXX Tax Services Office of September 14, 2000.
In your letter, you state that the employees of the XXXXXXXXXX will become employees of the new City of XXXXXXXXXX (the "New City") when the latter is created as of XXXXXXXXXX. All existing municipalities in the geographic area of jurisdiction of XXXXXXXXXX will cease to exist and their assets and legal obligations will be assumed by New City. You further state that, pursuant to the terms of their respective collective agreements, certain employees of the City of XXXXXXXXXX will become entitled to receive the cash equivalent of accumulated sick leave benefits prior to their cessation of employment with the City of XXXXXXXXXX and their commencement as employees of New City.
You have asked if the payment of the sick leave credits would be considered to be a "retiring allowance" for the purposes of the tax-deferred roll-over to a registered retirement savings plan contained in paragraph 60(j.1) of the Income Tax Act (the "Act").
Written confirmation of the tax implications inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request. However, we are prepared to provide the following comments which are of a general nature.
A payment in recognition of long service or in respect of loss of an office or employment relating to unused sick leave credits qualifies as a retiring allowance for the purposes of the Act when the payment is made on termination of employment. This position is expressed in paragraph 5 of Interpretation Bulletin IT-337R3, Retiring Allowances (copy attached).
To be a retiring allowance, the payment must be received upon or after retirement or be paid in respect of a loss of office or employment. The Agency has stated in subparagraph 3(b) of IT-337R3 that retirement or loss of office does not generally include termination of employment with an employer followed shortly by employment with an affiliate of the former employer. As can be seen from the further comments on "affiliate" in paragraph 3 of IT-337R3, for the purpose of the definition of a retiring allowance, we view the term "affiliate" as having a broad meaning which could result in the employees not being considered to have lost their office or employment. This interpretation appears to apply to the employees of New City in that they continue to be employed by an affiliate of the City of XXXXXXXXXX. Consequently, they would not be considered to have retired for purposes of the Act.
You have also asked us to confirm that severance payments paid to members of council by the City of XXXXXXXXXX before the creation of New City will be considered to be retiring allowances even though they may be elected to the council for New City.
In reply, the same rationale described in the 2nd paragraph immediately above would also appear to apply to members of council unless there is an actual severance of employment followed by a new employment as a result of an election. If you wish to discuss this aspect further, please contact Gord Kauppinen at (613) 957-8971.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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