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:
In a particular case, is an amount received by an individual, a retiring allowance or a receipt of income from employment?
Position:
Based on the facts provided it would appear to be a salary continuation payment. However additional information might indicate that a portion of the amount may be treated as a retiring allowance.
Reasons:
The terms of and the description of a payment in a document must be considered together with other facts including the (former) employee's continued participation in various employment plans. In particular, continued accruals of pensionable service generally indicates continued employment. However, a payment of a retiring allowance can be paid prior to the loss of employment and a payment might include amounts that can properly be treated as a retiring allowance if they can be isolated and identified as such.
November 27, 2000
International Tax Services Office Headquarters
Director W.C. Harding
(613) 957-8953
Attention: Susan Tong-Lim
NR7-R 99-#501817
2000-005409
Classification of Payments Received
as Employment Income or Retiring Allowance
This is in reply to your Memorandum of October 30, 2000, and our telephone conversation of November 8, 2000, (Harding/Tong-Lim) in which you requested our comments on the nature of a series of payments received by a taxpayer.
Facts:
The Taxpayer received a letter dated XXXXXXXXXX, from his former employer referred to therein as the "Termination Agreement" and/or the "Severance Agreement" (the "Agreement"). The Agreement confirms the taxpayer's termination of employment with the employer and sets out the terms and conditions of the termination. The terms of the Agreement were accepted by the taxpayer on XXXXXXXXXX. For the purposes of this memorandum, the significant terms and conditions set out in the Agreement are as follows:
1. The Agreement states that the working notice of termination under common law was XXXXXXXXXX.
2. The taxpayer's termination of employment was, as specified in the Agreement, effective XXXXXXXXXX.
3. The employer was to continue to pay a bi-weekly income of $XXXXXXXXXX less deductions, through XXXXXXXXXX. The Agreement states that the payments of this income were to include "all entitlements you may have under Company policy, common law, as well as any statutory entitlements to notice pay, severance pay, and vacation pay you may have under the Employment Standard Act".
4. Short term and long term disability would cease XXXXXXXXXX, provided the taxpayer continued paying required contributions.
5. Participation in the [registered] pension plan would cease XXXXXXXXXX.
6. Participation in the employee RRSP would cease XXXXXXXXXX.
7. Participation in the employee stock purchase plan would cease XXXXXXXXXX.
8. Coverage under the employer's medical, dental and life insurance plans would continue to XXXXXXXXXX provided contributions by the taxpayer were made as required. At that time, conversion rights commonly provided to terminating employees would be available.
9. Outplacement services would be provided for XXXXXXXXXX from the last day of employment.
10. Employer owned property was to be returned by XXXXXXXXXX.
11. The taxpayer by acceptance of the Agreement acknowledged (among other things) that his employment was terminated on XXXXXXXXXX, and that the severance package included his termination pay, severance pay and vacation pay pursuant to common law and the employment Standards Act.
We also understand from our telephone conversation, that the employer withheld non-resident withholding tax on the amounts paid under the Agreement in accordance with the provisions for the payment of remuneration.
The Agreement purports to set out the specific date of termination as XXXXXXXXXX. While this is a significant factor, it cannot be considered in isolation but must be considered together with the other terms of the Agreement in order to determine when, in fact, the employee was terminated. In this respect, it is of note that the taxpayer continued to be a member of the employer's [registered] pension plan, group RRSP, employee stock purchase plan, and the employer's medical, dental and life insurance plans, until XXXXXXXXXX. Continued participation in these types of plans generally reflects a continued employer-employee relationship. We note, in particular, that an individual cannot normally accrue pensionable service under an employer's registered pension plan if the individual is not employed by that employer. In consequence, we do not normally accept that an employee has terminated employment until the accrual of services ceases.
We also note that the health and life insurance benefits were continued in a manner not normally provided by the employer to terminated employees and that the employer's normal conversion entitlements offered to terminating employees, with respect to health and insurance benefits, were made available to the individual on XXXXXXXXXX. In our opinion, this also tends to support a position that the individual continued his employment to XXXXXXXXXX.
Caution must be used in considering the language used in these kind of documents because they are often drafted in an informal manner. However, with respect to the description of the payments provided in XXXXXXXXXX the Agreement (3 above), it is of note that the employer agreed to "continue to pay ... a bi-weekly income...." This language appears to support the position that the employer was prepared to pay salary continuation for the period ending XXXXXXXXXX, and not a retiring allowance. We also believe this is substantiated by the fact that the employer treated the payments as salary continuation payments for the purpose of determining the source deductions payable.
Taken together, it appears to us that employment did not cease on XXXXXXXXXX, but continued to XXXXXXXXXX. However, this does not necessarily mean that the payments are not retiring allowances. The Agency takes the position that a retiring allowance that is paid in respect of a loss of an employment (as provided under paragraph (b) of the definition of "retiring allowance" in subsection 248(1) of the Income Tax Act) may be paid before the date an employee is actually terminated. Accordingly, while we are of the opinion that the individual did not cease to be employed until XXXXXXXXXX, it is clear that he did lose his employment and it is therefore possible that a portion of the amounts received by the taxpayer may be treated as a payment of a retiring allowance.
A determination of whether any portion of the payments may be treated as a retiring allowance must also be determined on a factual basis and, in our view, such a determination should not be made solely on the basis of the information provided. As a minimum, it would be necessary to ascertain:
- What determinations were made by the employer and the employee with respect to the items included in the payments described in the last sentence of XXXXXXXXXX the Agreement (see 3 above). It would appear to us that the full amount of the payments were paid as salary continuance in lieu of the itemized entitlements. Nevertheless, if an accounting of the items and more specific information were provided it may be possible to treat some of the amounts as payments of a retiring allowance.
- What portion (if any) was used as the basis for determining the employee's retirement benefits under the pension plan. The amount used to fund benefits under the plan cannot also be treated as a retiring allowance.
If additional information cannot be obtained, as noted above, it appears to us that a position can be taken that the full amount of the payments were paid as salary continuance in lieu of the itemized entitlements listed.
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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