2001 Ruling 2000-0055453 - 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:

1. Is a retiring allowance in the amount equal to the amount eligible for the paragraph 60(j.1) rollover reasonable for the purposes of section 67?

2. Can an individual be considered to be employed for the purposes of paragraph 60(j.1) where he or she is a shareholder of the employer and all remuneration is received in the form of dividends?

3. Can an individual be considered to be still employed within the meaning of paragraph 60(j.1) if he or she ceases to be performing duties related to an active business but continues as an employee managing a rental property? Usually the query is whether the employee can be considered to be retired notwithstanding his or her continuing to provide services in respect of a rental property. Here, the client wants all years, including the years he managed the rental property, until the year after the rental property was sold, to count as years of employment for the purposes of paragraph 60(j.1). Some of these latter years are pre-1996 and therefore the answer affects how much can be rolled over to an RRSP.

Position:

1. Generally yes. 2. Yes. 3. Yes.

Reasons:

1. Published position 1992 Prairie Provinces Tax Conference.

2. Yes. An employee/employer relationship can exist even if no remuneration is paid.

3. The management of a rental operation could be considered to be an "active" activity or a "passive" activity depending upon the nature of the services performed. However, strictly speaking, subclause 60(j.1)(ii)(A) only requires that the employee be "employed by the employer" at some time during a particular year.

XXXXXXXXXX 		2000-005545

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, which was received by us on XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge our subsequent telephone conversations (XXXXXXXXXX) regarding this issue.

Our understanding of the facts, proposed transaction and purpose of the proposed transaction is as follows:

Facts

1. XXXXXXXXXX ("Oldco") was incorporated in XXXXXXXXXX and XXXXXXXXXX common shares were issued to each of XXXXXXXXXX ("Mr.") and XXXXXXXXXX ("Mrs.") XXXXXXXXXX.

2. On XXXXXXXXXX, the shareholders transferred their XXXXXXXXXX common shares of Oldco pursuant to subsection 85(1) of the Income Tax Act (the "Act") to XXXXXXXXXX ("Holdco"), a holding Company. Mr. and Mrs. each received XXXXXXXXXX common shares of Holdco in exchange for their shares of Oldco.

3. On XXXXXXXXXX, Oldco transferred the business inventory, machinery, equipment and goodwill to XXXXXXXXXX ("Newco") pursuant to subsection 85 of the Act in exchange for XXXXXXXXXX common shares of Newco.

4. Firstly Oldco, and then Newco, carried on the business of XXXXXXXXXX until XXXXXXXXXX, at which time the business assets, except the operating premises located at XXXXXXXXXX (the "Premises") were sold to an arm's length purchaser, XXXXXXXXXX ("Inc."). At that time, Inc. commenced to lease the Premises from Newco.

5. On XXXXXXXXXX, Newco, Oldco and Holdco were amalgamated under their new names of XXXXXXXXXX. The amalgamated corporation continued under the name XXXXXXXXXX ("Amalco").

6. Mr. and Mrs. were both employed by Oldco from its incorporation until the sale of the business assets in XXXXXXXXXX.

7. During the period from XXXXXXXXXX until XXXXXXXXXX, Mr. and Mrs. carried out various duties related to the rental of the Premises and other investments held by Amalco or a predecessor corporation. These duties included accounting functions, arranging for any needed repairs and maintenance, and all banking functions. On XXXXXXXXXX, the Premises were sold. Amalco took back a mortgage on the Premises. It is anticipated that Amalco will be wound up when the mortgage is discharged.

8. After XXXXXXXXXX for Mrs. and XXXXXXXXXX for Mr., the individuals were remunerated through the payment of dividends. On XXXXXXXXXX , Mr. and Mrs. resigned as officers of Amalco. They will continue, however, as directors of Amalco.

9. Neither Amalco or nor any of the predecessor companies has ever made any contributions to a pension plan or profit sharing plan on behalf of Mr. or Mrs., or paid Mr. or Mrs. a retiring allowance.

Proposed Transaction

10. Amalco will pay a retiring allowance of $XXXXXXXXXX to each of Mr. and Mrs.

Purpose of the Proposed Transaction

11. The purpose of the proposed transaction is to recognize the long and distinguished service of Mr. and Mrs. to Amalco and its predecessors.

Additional Information

The business number of Amalco is XXXXXXXXXX. Amalco's income tax returns are filed at the XXXXXXXXXX Taxation Office and it deals with the XXXXXXXXXX Tax Services Office.

Mr. and Mrs.'s S.I.N. numbers are XXXXXXXXXX respectively.

To the best of your knowledge and the knowledge of the taxpayers involved, none of the issues in this request for an advance income tax ruling:

(a) is in an earlier return of any of the taxpayers or of a person related to any of the taxpayers;

(b) is being considered by a tax services office or tax centre in connection with a previously-filed return of any of the taxpayers or of a person related to any of the taxpayers;

(c) is under objection by any of the taxpayers or by a person related to any of the taxpayers;

(d) is before the courts; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to any of the taxpayers.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of the relevant facts, proposed transaction and purpose of the proposed transaction, we rule as follows:

A. The amounts paid will qualify as a retiring allowance as defined in subsection 248(1) of the Act.

B. Mr. and Mrs. will each be able to deduct, pursuant to paragraph 60(j.1) of the Act, such amount as is designated by him or her in his or her income tax return not exceeding the lessor of the retiring allowance received in the year and the amount contributed to his or her registered retirement savings plan in the year or within 60 days after the end of the year to the extent that it was not deducted in computing his or her income for a preceding taxation year.

C. The retiring allowances will be considered deductible expenses to Amalco pursuant to subsection 9(1) of the Act and the deductions will not be denied pursuant to paragraph 18(1)(a) or section 67 of the Act.

The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on the Canada Customs and Revenue Agency provided that the retiring allowances are paid prior to XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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