3 June 2004 External T.I. 2004-0070031E5 - Retiring Allowance - re-employment

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: Can a person who retires and is rehired subsequently by the previous employer, receive a retiring allowance upon retirement?

Position: No, if the person knew that he would be working for the previous employer at the time of retirement.

Reasons: Interpretation of "loss of an office or employment" in the definition of "Retiring Allowance".

XXXXXXXXXX 							2004-007003
A. St-Amour, CA
June 3, 2004

Dear XXXXXXXXXX:

Re: Severance Allowance

This is in response to your letter of April 7, 2004, in which you ask what the time limit is on re-employment when an employer has given an employee a severance allowance. You also ask us to confirm the tax consequences should the employee be re-employed.

Unless otherwise stated, all references to a statute are to the Income Tax Act (the "Act").

Comments:

The particular situation outlined in your letter appears to relate to a factual one, involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form on an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments, which may be of assistance. Please note that these comments are general in nature and may not apply in a particular situation.

Whether an amount received by an employee, upon or after termination of employment, is income from employment, and therefore included in income pursuant to subsection 5(1), or a retiring allowance, within the meaning thereof in subsection 248(1), and therefore included in income pursuant to subparagraph 56(1)(a)(ii), is a question of fact that can only be determined after a review of any employment contracts, other agreements and all of the other circumstances relevant to a particular situation.

Retiring allowance is defined in subsection 248(1) 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 judgement of a competent tribunal.

The Canada Revenue Agency's ("CRA") general views regarding retiring allowances are set out in Interpretation Bulletin IT-337R4, "Retiring Allowance". A copy can be obtained on our website at the following address: http://www.ccra-adrc.gc.ca/E/pub/tp/it337r4/README.html. Paragraph 8 states that retirement or loss of office does not include:

"(a) transfer from one office or position to another with the same employer (or an affiliate), in a different capacity (including one with diminished responsibilities). ...[or]

(b) 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 employment ..."

In Technical News No. 7, dated February 21, 1996, the CRA made the following comment:

"We did not intend to place a temporal limit on the period after termination of the employment in which an individual could not be hired by an affiliate. Instead, the intention was to deny retiring allowance treatment of payments made by the employer where arrangements have been made for the individual to obtain employment with an affiliate. If there is no assurance or offer of a new employment with an affiliate at the time the individual ceases the employment, then we will consider a loss of employment or retirement to have occurred."

These comments continue to be valid and apply equally to the situation where it is the previous employer and not an affiliate that offers the subsequent employment.

Therefore, where in an arm's length situation, an employee has retired without any assurance at the time of retirement of being hired by an affiliate, or being rehired by his former employer, and receives from the former employer, a payment based on long service, it is the CRA's position that this payment will qualify as a retiring allowance notwithstanding that the individual might be hired by the affiliate, or rehired by the former employer, at a later time when circumstances have changed. In such circumstances, the fact that an employee would retain its seniority would not by itself change the nature of the retiring allowance.

If retiring allowance treatment is denied, the amount will be considered employment income taxable in accordance with subsection 5(1) and subject to withholding tax in accordance with subsection 153(1). No deduction from the employee's income under paragraph 60(j.1) will be available with respect to the transfer of any part of the amount to the employee's registered retirement savings plan ("RRSP") and, if such a contribution is made, it will be subject to the employee's RRSP deduction limit. An amount paid to the RRSP in excess of the RRSP deduction limit may be subject to the Part X.1 over-contribution tax.

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,

Ghislain Martineau
Section Manager
for Division Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch