4 November 2004 External T.I. 2004-0087721E5 - Taxable Income

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 the repayment of a severance amount be deducted from income in the year of repayment?

Position: Question of Fact.

Reasons: Where the amount received by the taxpayer meets the definition of "retiring allowance" in subsection 248(1) of the Act and is included in income by virtue of 56(1)(a)(ii) of the Act, the amount of any repayment is deductible under subparagraph 60(n)(iii) of the Act.

2004-008772

XXXXXXXXXX Luisa A. Majerus, C.A.

(613) 957-2138
November 4, 2004

Dear XXXXXXXXXX:

Re: Taxable Income

This is in reply to your facsimile dated July 26, 2004, requesting information on the deductibility of a repayment of a severance amount. Specifically, you are concerned that, if the amount received from your employer is repaid, there will be no recourse to reduce the income reported in the year the amount was received.

You have described a situation in which your employer, as a result of the bankruptcy of the employer's business, paid you an amount for your loss of employment. You reported the amount received as employment income in the year of receipt. The Trustee in bankruptcy has requested that you repay the amount. You are currently negotiating with the Trustee regarding the timing and the amount, if any, of repayment.

Our 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, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

Subparagraph 56(1)(a)(ii) of the Income Tax Act (the "Act") includes in computing the income of a taxpayer for a taxation year any amount received by the taxpayer in the year as, on account or in lieu of payment of, or in satisfaction of, a retiring allowance. Subsection 248(1) of the Act defines "retiring allowance" which includes an amount received 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.

Subparagraph 60(n)(iii) of the Act provides a deduction in computing the income of a taxpayer for a taxation year for any amount paid by the taxpayer in the year as a repayment of any amount described in subparagraph 56(1)(a)(ii) of the Act. This deduction is limited to the amount was included in computing the taxpayer's income, and not deducted in computing the taxpayer's taxable income, for the year or for a preceding taxation year.

Therefore, where an amount is received and included in income in the year of receipt as a retiring allowance, any subsequent repayment of the retiring allowance may be deducted in computing the income of the taxpayer in the year of repayment. Please note that when calculating income for the year, a deduction under subparagraph 60(n)(iii) in a taxation year cannot exceed all other sources of income. Consequently, a loss cannot be created and carried back or forward to other taxation years.

We trust this information is helpful.

Yours truly,

John Oulton, CA
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch