2 May 2003 External T.I. 2003-0006395 - US RETIRING ALLOWANCE PAID TO CANADIAN

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:

1. Will a severance payment received by a Canadian resident from his or her former U.S. employer be taxable as a retiring allowance?

2. Will the income taxes paid to the U.S. be eligible for the foreign tax credit?

Position:

1. Yes.

2. Yes.

REASONS:

1. Retiring allowance included in income under 56(1)(a)(ii) of the Act.

2. The foreign tax credit will apply in accordance with section 126 of the Act.

XXXXXXXXXX 			2003-000639

May 2, 2003

Dear XXXXXXXXXX:

Re: Retiring Allowance and Rollover to an RRSP

We are writing in reply to your electronic message of March 3, 2003 wherein you requested our general views regarding retiring allowances paid by a U.S. employer and the amount that could be transferred to a registered retirement savings plan ("RRSP") under paragraph 60(j.1) of the Income Tax Act (the "Act").

You describe a situation where a former resident of Canada worked for a Canadian employer for several years then he moved to the U.S. to work for an employer that was related to his former Canadian employer. The U.S. employer terminated the individual's employment and agreed to pay the individual a retiring allowance in respect of his or her employment services. The individual returned to Canada and has commenced to receive the retiring allowance payments from the U.S. employer.

Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

Under the Act, each Canadian resident is required to report his or her world income from sources both inside and outside Canada. The CCRA's general views regarding the determination of an individual's residence are found in the latest version of Interpretation Bulletin IT-221 entitled Determination of an individual's residence status. The determination of whether a particular individual is a resident of Canada at any particular time is a question of fact.

A person would become a resident of Canada for income tax purposes when he or she establishes sufficient residential ties in Canada. We note that an individual that is only a part-year resident is only required to report his or her world income for the part of the year that the person is resident in Canada. A taxpayer's world income would include any employment income, pension income, business income and investment income (foreign or Canadian) received during the relevant period. Reference should also be made to any relevant income tax conventions with regard to the taxation of foreign source income for a period that you are considered a resident of Canada. Generally (within specified limits), foreign income or profits taxes paid in respect of foreign source income will be creditable in the computation of your Canadian income taxes. Please refer to Interpretation Bulletin IT-270R2s entitled Foreign tax credit and the other publications referred to therein for additional information. Generally, any taxes withheld by the U.S. employer would be eligible for the foreign tax credit described above to the extent that the retiring allowance arises in the U.S.

When an individual becomes a Canadian resident (i.e., immigrates to Canada), subsection 128.1(1) of the Act generally deems that individual to have disposed of each property owned by him/her immediately before that time for proceeds of disposition equal to the fair market value of the particular property at that time and to have re-acquired each such property so disposed of for a cost equal to the amount of the deemed proceeds. There are also similar deemed disposition rules when an individual ceases to be a Canadian resident (i.e., emigrates from Canada) in subsection 128.1(4) of the Act. The purpose of these deeming rules is to ensure that the appropriate amount of income or gain accrued from holding the property during the individual's Canadian residency period is subject to income tax in Canada. We note that an individual's right to a retiring allowance is excluded from the deemed disposition rules.

The CCRA's general views regarding retiring allowances are found in Interpretation Bulletin IT-337R3 entitled Retiring Allowances.

In IT-337R3's Summary, we state that a retiring allowance is an amount received on or after the retirement of an employee in recognition of long service or in respect of a loss of office or employment. Paragraph 2 of IT-337R3 provides the legal definition of retiring allowance in subsection 248(1) of the Act. A resident of Canada is required to include the amount of retiring allowance received in the year in his or her income under subparagraph 56(1)(a)(ii) of the Act. Since a resident of Canada is taxed on his or her world income, the retiring allowance will be taxable whether it is paid by a Canadian employer or by a foreign employer.

Paragraphs 12 and 13 of IT-337R3 discuss the computation of the amount of any retiring allowance that may be eligible for transfer to an RRSP. They will help you in computing any amount of any retiring allowance that may be eligible to transfer to an RRSP.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate