24 November 2003 External T.I. 2003-0036065 - 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 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 lump sum amount received by an employee upon retirement is income from employment, a retiring allowance or non-taxable.

Position: Question of fact.

Reasons: A review of each specific situation would determine whether an amount would be subject to tax when it is received, and if so, the appropriate tax treatment thereof.

A. Seidel
XXXXXXXXXX (613) 957-2058
2003-003606
November 24, 2003

Dear XXXXXXXXXX:

Re: Employer-Funded Lump Sum Payment

We are writing in response to your letter dated June 16, 2003, wherein you requested our comments regarding the tax implications of a lump sum payment made by an employer, to certain employees upon retirement under a specific benefit plan, where the employees' contributions to the benefit plan have been lost.

You describe a situation where certain employees entered into an arrangement (the "Plan") with their employer whereby the employees and the employer made contributions to the Plan and the employees were then entitled to receive a lump sum amount when they retire. The employer's contributions to the Plan were included in the employee's income as a taxable benefit, pursuant to paragraph 6(1)(a) of the Income Tax Act ( the "Act"), for income tax purposes. The employer subsequently sold the business. The purchaser retained all of the employees and assumed the liabilities arising under the Plan. However, funds representing the employees' and the previous employer's contributions to the Plan were not transferred to the purchaser. The employees will, however, still receive a lump sum benefit from the new employer. You are concerned that the entire amount received from the new employer will be included in computing income for income tax purposes and that the employees will not get an offsetting deduction for their earlier contributions to the Plan. You would, therefore, like to continue applying a "premium" to each employee's pay such that, when an employee retires, the lump sum amount received by the employee would not be included in computing income.

The particular circumstances in your letter, on which you have asked for our views, relate to a factual situation involving specific taxpayers and completed transactions. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we would point out that advance income tax rulings are not provided in respect of transactions that are substantially completed. Completed transactions are reviewed by the local tax services office.

Although we cannot provide any specific comments with respect to the situation described in your letter, the following general comments may be of assistance.

Subsection 8(2) of the Act states that "[E]xcept as permitted by this section, no deductions shall be made in computing a taxpayer's income for a taxation year from an office or employment". Where an employee and a previous employer had made contributions to a plan which was intended to give rise to a payment upon retirement, the employer's contributions to the plan were included in computing the employees' income as a taxable benefit in the year they were made, but such contributions were not transferred to the purchaser on the sale of the business in which the employee was employed, such contributions of the previous employer and the employee will no longer provide a payment upon retirement. Section 8 of the Act does not provide a specific deduction for such lost contributions and does not provide a deduction for the loss of the amounts previously included in income as a taxable benefit. Subsection 8(2) of the Act would therefore apply to deny the employees any deduction in respect of their contributions to the plan and/or the previous employer's contributions to the plan. Whether or not an employee could be entitled to administrative relief is the decision of the local tax services office, in this case, the Saskatoon Tax Services Office.

The definition of "retiring allowance" in subsection 248(1) of the Act includes an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service. Where such a payment is pursuant to an employer-funded benefit, the amount received by the employee will be included in computing income for income tax purposes pursuant to subparagraph 56(1)(a)(ii) of the Act. Where such a payment is pursuant to a plan that is partially employer-funded and partially employee-funded, the amount to be included in computing income, as a retiring allowance pursuant to subparagraph 56(1)(a)(ii) of the Act, will be restricted to that portion of the payment that relates to the employer's contribution to the plan.

Where a company is sold, the purchaser may assume liability for the previous employer's contributions to the Plan. Where the amounts contributed to the Plan before the sale of the company have already been taxed in the hands of the employees, such amounts will not be included in income when paid out on retirement. On retirement, the employees will include in income those amounts that are attributable to any contributions to the Plan by the new employer. These amounts will fall within the definition of "retiring allowance" in subsection 248(1) of the Act and be included in income pursuant to subparagraph 56(1)(a)(ii) of the Act.

Paragraph 6(1)(a) of the Act includes in an employee's income "the value of ... other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment". Where an employer agrees to make a payment (with no previous funding by the employer), such as a retiring allowance upon retirement, the amount of the payment will be included in an employee's income at the time the payment is received by the employee. Therefore, when an employer makes no contributions to a Plan, your proposal to continue to add a taxable "premium" to an employee's pay each payday, as a "notional" taxable benefit, would be inappropriate.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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