24 August 2001 External T.I. 2001-0078255 - 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 proposed retiring allowance reasonable and deductible?

2. Would tax withholding be required if transferred to RRSP?

3. Can retiring allowance be paid to spouse, the Secretary/Treasurer?

Position:

1. Questions of fact.

2. Not on amount transferred directly as per 60(j.1).

3. Question of fact.

Reasons:

1. Unclear if taxpayer is full-time employee.

2. Reg 100(3)(c) exempts amount transferred to RRSP under 60(j.1).

3. Unclear if spouse is full-time employee.

XXXXXXXXXX 2001-007825
P. Kohnen
August 24, 2001

Dear XXXXXXXXXX:

Re: Retiring Allowance

This is in reply to your letter of March 26, 2001, requesting our views regarding the reasonableness and the deductibility of proposed retiring allowances for both yourself and your spouse.

The views of the Canada Customs and Revenue Agency ("CCRA") on the subject of retiring allowances are contained in Interpretation Bulletin IT-337R3 ("IT-337R3"). A copy is enclosed for your information.

The particular circumstances in your letter on which you have asked for our view appears to be a factual situation involving specific taxpayers. As explained in Information Circular 70-6R4 (a copy of which we have enclosed for your information), it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments, which may be of assistance.

Our Comments:

The amount of retiring allowance that can be transferred under paragraph 60(j.1) of the Income Tax Act (the "Act") to an RRSP under which the recipient is the annuitant is discussed in IT-337R3. In general, you can transfer an amount of retiring allowance to your RRSP in the year you receive it, or within 60 days after the end of that year to the extent it does not exceed the sum of:

i) $2,000 times the number of calendar years before 1996 during which you were employed by the employer paying the retiring allowance, or by an employer related to your employer; and

ii) $1,500 times the number of years described in i) that are before 1989 for which employer contributions to a pension plan or deferred profit sharing plan of your employer or an employer related to your employer did not vest in you at the time the retiring allowance was paid.

An employer's deduction of an amount payable to an employee as a retiring allowance is subject to the general provision concerning the deduction of reasonable expenses made or incurred for the purpose of gaining or producing business income as provided in section 67 of the Act. Thus, the amount payable to the employee must be reasonable in the circumstances considering the employee's length of service, the relationship of the amount of the retiring allowance to the remuneration received for the years of service and the value of the pension and other retirement benefits to which the employee is entitled in respect of the service. As is noted in IT-337R3, CCRA will generally consider an amount not exceeding the amount eligible for deduction pursuant to paragraph 60(j.1) of the Act, in respect of the employee, to be a reasonable amount for this purpose, for a full-time employee. It was not evident from your submission whether you and you spouse are full-time employees of the company.

In regard to your question concerning deductions at source, subsection 100(3) of the Income Tax Regulations provides that no withholding is required on the eligible amount of a retiring allowance that is directly transferred to an RRSP under paragraph 60(j.1) of the Act. An employee who wishes to transfer an eligible amount under paragraph 60(j.1) of the Act, to an RPP or RRSP, is no longer required to complete a Form TD2. If the retiring allowance is paid to the employee, it is subject to withholdings.

It is noted from your letter that you and your spouse are contemplating retiring within the next year or two, on the dissolution of your company. In the event that you decide upon proposed transactions in regard to the payment of retiring allowances, within determinable timeframes, you may wish to request an advance income tax ruling. Such a ruling is considered to be binding upon the Canada Customs and Revenue Agency, subject to any qualifications contained in the ruling or in Information Circular 70-6R4. We have enclosed an actual ruling, which has had all confidential information removed, for your perusal.

We trust that the above comments are of assistance. Please do not hesitate to contact Phillip Kohnen at (613) 957-2093 should you require further information.

Yours truly,

Roberta Albert, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate