19 April 2004 External T.I. 2004-0065551E5 - Retirement Allowance - by instalments

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: What is the basis for the CRA's position in paragraph 17 of Interpretation Bulletin IT-337R4?

Position: Question of fact and question of law in each particular case.

Reasons: In the example cited in the bulletin, the employee must choose the instalment feature before he is legally entitled to receive the retiring allowance.

XXXXXXXXXX 						2004-006555
A. St-Amour, CA
April 19, 2004

Dear XXXXXXXXXX:

Re: Taxation of retiring allowances

This is in response to your letter of March 4, 2004 in which you asked whether or not the position stated in paragraph 17 of IT-337R4 is applicable in your particular situation.

In your letter, you mentioned that under your retiring allowance program, you propose to offer terminated employees the option of receiving either a discounted lump sum retiring allowance or a larger amount, paid out in instalments over a period more than one calendar year. You are asking if terminated employees can have a certain limited period of time, after retirement, to choose either the lump sum or the instalment option.

Comments:

The subject matter of your letter appears to pertain to particular situations. 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 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, any inquiries should be addressed to the relevant tax services office. However, we are prepared to provide the following comments that may be of assistance to you. Please note that these comments are general in nature, may not apply in a particular situation and are not binding on the Canada Revenue Agency ("CRA").

Retiring allowance is defined in subsection 248(1) of the Income Tax Act (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 by a taxpayer on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service or in respect of a loss of an 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. It is a question of fact whether or not a particular payment qualifies as a retiring allowance.

As stated in paragraph 17 of Interpretation Bulletin IT-337R4, Retiring Allowances, the employees may have the option of receiving an amount either as a lump sum at the time of termination or in instalments over a number of years under programs designed to encourage voluntary retirements. It is also mentioned in that paragraph that if the employee chooses the instalment option on or before the employment is terminated, the instalments are taxable in the year received. It is our opinion that the election to choose the instalment option must be made on or before termination of employment, that is, before an employee is legally entitled to demand payment of the termination amount and the employer is obligated to pay the amount.

There is no provision in the Act, which prohibits the payment of a retiring allowance in instalments or requires it be paid within a certain period of time after the retirement or the loss of employment.

A retiring allowance is required to be included in an employee's income for the year that is the earlier of the year in which the retiring allowance is paid to the employee and the year the employee has constructively received payment thereof. The determination of whether constructive receipt exists in a specific situation is a question of fact. The CRA's general views in respect of the concept of constructive receipt can be found in its response to question 13 at the CRA Round Table published in the 1984 Conference Report wherein it states:

"The Department considers an amount to have been received by an employee upon the earlier of the date upon which payment is made and the date upon which the employee has constructively received a payment. Constructive receipt is considered to occur in situations where an amount is credited to an employee's debt or account, set apart for the employee, or otherwise available to the employee without being subject to any restriction concerning its use."

It is our view that constructive receipt in a particular year would occur, for example, where the employee has the right to the payment of the retiring allowance in the year and the employer is obligated to pay it but the payment is deferred to accommodate the employee. To make this determination, the facts in each particular situation must be reviewed including the employment contract (which includes the terms of a voluntary reduction program).

The fact that an amount received as a lump sum is lesser than the sum of all amounts that would alternatively be received by instalments would not, by itself, disqualify the amount in question as a retiring allowance as long as the taxpayer is legally entitled to the amount. However, we are of the view that if the instalments are larger amounts, they may reflect an amount of interest income earned on the outstanding balance of a retiring allowance. As stated in paragraph 17 of IT-337R4, the interest income is not itself a retiring allowance but rather is taxed as interest income under paragraph 12(1)(c) of the Act and, it cannot be used to increase the amount eligible for deduction under paragraph 60(j.1) of the Act. You may wish to pursue the matter further by requesting an advance income tax ruling.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CRA.

Yours truly,

for Director
Financial Industries Division,
Income Tax Rulings Directorate
Policy and Planning Branch