20 March 2003 External T.I. 2003-0004675 - RETIRING ALLOWANCE CONTRACT WORK

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Whether a severance payment qualifies as a retiring allowance when the former employee may be hired as a consultant.

Position: Question of fact

Reasons:

Unsure whether employment ceased or continues under the circumstances.

XXXXXXXXXX 		2003-000467
			Cornelis Rystenbil, CGA
March 20, 2003

Dear XXXXXXXXXX:

Re: Retiring allowance

This is in reply to your letter of February 22, 2003 in which you ask whether a severance payment would qualify as a retiring allowance where the former employee enters into an agreement with the employer to provide future services as a consultant on an "as required basis" for a 24 month period.

In an effort to reduce its overhead costs, the employer will terminate the employees of certain of its specialty groups. If it has future needs for the former employees of the specialty groups, they will be rehired as independent consultants. The former employees will operate as independent consultants and will provide their services to other clients as well. As independent consultants, the former employees will provide professional services with little supervision; will not be an integral part of any organization; will provide their own equipment and office space; and will not perform routine employment tasks.

Comments

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 income tax ruling request. For more information concerning advance tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. Copies of information circulars, interpretation bulletins and guides are available at your local Tax Services Office or on the Internet at www.ccra-adrc.gc.ca/formspubs/menu-e.html.

Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments, which may be of assistance.

The Canada Customs and Revenue Agency's general views regarding retiring allowances are found in Interpretation Bulletin IT-337R3 entitled Retiring Allowances. Where an amount qualifies as a retiring allowance, the amount must be included in the taxpayer's income by virtue of subparagraph 56(1)(a)(ii) of the Income Tax Act (the "Act") in the year in which it is received.

As noted in paragraph 2 of IT-337R3, a "retiring allowance" is defined in subsection 248(1) of the Act to mean an amount received:

(a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or

(b) in respect of a loss of office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal,

by the taxpayer or, after the taxpayer's death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer.

We also note that paragraph 3 of IT-337R3 states that "Retirement or loss of an office or employment does not include: ... termination of employment with an employer followed by;

? re-employment with the employer (on a full or part-time basis) or
? employment with an affiliate of the employer

pursuant to an arrangement made prior to the termination of the employment ...".

The determination of whether a former employee has retired or lost his or her office or employment in the above situation is a question of fact. All of the facts would have to be provided in each particular case in order to determine whether or not specific payments qualify as a retiring allowance for purposes of the Act.

In determining whether a person is providing services as an employee or a self-employed individual, we would use the tests developed over time by the Courts to determine whether an individual is an employee or an independent contractor. For further information please see our guide "RC4110, Employee or Self-employed?". Consequently, in the above situation, we would need to review all of the facts to determine whether the employment has actually been terminated or simply changed from full-time to part-time in each particular case.

Where it is determined that the former employees provide their services in the capacity of an employee, in our view, the severance payments would not qualify as a retiring allowance. On the other hand, where it is determined that employment has in fact ceased and the former employees go into business and some of their business income is earned from their former employer, the severance payments would appear to qualify as retiring allowances for purposes of the Act. If you decide to seek our interpretation of the Act with respect to specific proposed transactions, we would be pleased to review your situation in the context of an advance income tax ruling. To do so, we would require the information set out in IC 70-6R5 including copies of any severance agreements and copies of consulting contracts.

Retiring Allowance Eligible for Rollover to an RRSP

Paragraph 12 of IT-337R3 discusses the amount that could be rolled over to a registered retirement savings plan ("RRSP") under paragraph 60(j.1) of the Act. A deduction is available under paragraph 60(j.1) of the Act for all or part of a retiring allowance included in the taxpayer's income under subparagraph 56(1)(a)(ii) of the Act that has been transferred to an RRSP under which the taxpayer is the annuitant. In general, the maximum amount that may be transferred under paragraph 60(j.1) is:

? $2,000 for each year or part year the taxpayer was employed by the employer prior to 1996, and

? $1,500 for each year or part year the taxpayer was employed by the employer prior to 1989 for which the employer's contributions to a pension plan or deferred profit sharing plan had not vested in the taxpayer at the time the retiring allowance is paid.

In addition to the above limit, to obtain a deduction under paragraph 60(j.1), the retiring allowance must be paid into the taxpayer's RRSP in the year the retiring allowance is received or within 60 days after the end of the year, and the RRSP contribution must not have been deducted from income in a preceding taxation year.

We trust that these general comments will be of assistance.

Yours truly,

Mickey Sarazin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate