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.
Principal Issues:
1. Whether the amount paid following the conversion of a severance pay to an equivalent number of weeks of leave with pay will constitute a retiring allowance?
2. Whether it is possible to elect to defer the receipt of a retiring allowance?
Position:
1. No, if the employee is entitled to accrue benefits including pension service during the leave with pay.
2. Yes, if the election is made prior to retirement or loss of employment.
Reasons:
Previous position taken
Danielle Chainé
Labour Relations & Compensation Operations
Human Resources Management Office 2004-006339
Treasury Board of Canada, Secretariat L. J. Roy, CGA
Ottawa ON K1A 0R5
March 15, 2004
Dear Mrs Chainé:
Re: Severance Pay
This is in reply to your email of February 20, 2004 wherein you requested an interpretation on whether payments pursuant to the amendment proposed to an agreement would be considered a retiring allowance that is eligible to be transferred under paragraph 60(j.1) of the Income Tax Act (the "Act") to a registered retirement savings plan.
The agreement permits the payment of a severance pay in circumstances such as lay-off, resignation, rejection on probation, retirement, death and termination for cause for reasons of incapacity or incompetence. The following amendment would be added to the agreement:
Upon request of an employee, an employee may:
i) in lieu of a full cash payment provided in this article, convert a portion of their severance pay, up to and including the full amount, to an equivalent number of weeks of leave with pay. The leave shall be taken during the period immediately prior to the termination date upon which the severance pay calculation was based.
ii) elect to defer receipt of any portion of their severance pay, up to and including the full amount, to January 1st of the following calendar year.
"Retiring allowance" is defined under subsection 248(1) of the Act to mean 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
i) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or
ii) 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.
A retiring allowance is taxable in the year of receipt pursuant to subparagraph 56(1)(a)(ii) of the Act. If a term of the employment contract provides that an employee has the option to receive the retiring allowance in installments and the option is exercised prior to or on retirement or loss of employment, then the employee is taxable on receipt of the whole or part of the retiring allowance in the year as received. Consequently, the amendment regarding the election to defer the payment of the severance pay should be modified to provide that the election has to be made prior to or on retirement or loss of employment.
Where a termination arrangement provides a leave with pay before the retirement or the loss of employment, including the continuance of certain benefits such as pension benefits, it is our view that the employment relationship has not been terminated and that the payments are actually regular salary or wages and taxable as such. This is so even where the employee is not required to report to work. In particular, pension benefits can only accrue to persons who are employees and, therefore, such benefits indicate that there is an employment relationship.
Therefore, if an employee elects to convert his severance pay to a leave with pay and that pursuant to such a leave, the employee receives his regular salary and is entitled to accrue pension service during the leave with pay, it is our view that payments under the leave with pay will be taxable as salary as oppose to retiring allowance.
We trust that our comments will be of assistance.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2004
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2004
Email this Content