16 November 2004 Internal T.I. 2004-0097241I7 - Severance Payment and RPP pensionable earnings

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: Whether a severance payment qualifies as "compensation" for the purposes of the registered pension plan (RPP) rules when received as a salary continuance or as a lump sum amount.

Position: Payments received as salary continuance may qualify subject to the terms of the RPP. However, a lump sum amount received as a retiring allowance will not qualifiy as "compensation" for the purposes of the RPP rules.

Reasons: The definition of "compensation" in subsection 147.1(1) of the Act, provides that an amount received in respect of an individual's office or employment and that is required to be included in income under sections 5 or 6 of the Act will meet the definition. Where the terms of a separation agreement provide for the severance amount to be paid in the form of salary continuance, the amount will be included in employment income under either subsection 5(1) of the Act alone or together with paragraph 6(3)(b). Accordingly, the amount will qualify as compensation. However, the payment of a retiring allowance is included in income under subsection 56(1) of the Act and would not meet the definition of compensation for the purposes of the RPP rules.

						November 16, 2004

	HEADQUARTERS				HEADQUARTERS
	Registered Plans Directorate		Income Tax Rulings
		  				Directorate
	Attention:  Alan Ruhland		C. Lalonde

						2004-009724

Pensionable Service for a Lump Sum Severance Payment

This is in response to your electronic message of October 5, 2004 requesting our views on whether a lump sum severance payment would qualify as "compensation" as defined in subsection 147.1(1) of the Income Tax Act (the "Act") for registered pension plan ("RPP") purposes and whether the employee could accrue pensionable service in respect of that payment. You asked whether the answer would the same if the employee received the amount as a salary continuance instead of the lump sum severance payment.

Our Comments

The term "compensation", as it applies to an RPP, is defined in subsection 147.1(1) of the Act. Pursuant to paragraph (a) of the definition, compensation includes amounts in respect of an individual's employment or office that are required (or would be required but for paragraph 81(1)(a) as it applies with respect to the Indian Act) by section 5 or 6 to be included in computing income for the year, except for amounts excluded by subparagraphs 147.1(1)(a)(iii) and (iv).

The term "severance payment" is not defined in the Act. Whether the severance amount received by an employee, upon or after termination of employment, is employment income, other remuneration or a retiring allowance is a question of fact. The ultimate determination as to the nature of the payment can only be made after a review of all of the circumstances relevant to a particular situation, namely the employment contract, any other employment agreements and, in some cases, possibly the court order or judgement giving rise to the payment.

The CRA's general views regarding retiring allowances are contained in Interpretation Bulletin IT-337R4, "Retiring Allowances." A retiring allowance as defined in subsection 248(1) of the Act includes an amount received in respect of a loss of office or employment. A loss of office or employment usually refers to the elimination or expiration of a particular office or employment. In this context, the words "in respect of" have been held by the Courts to imply a connection between the loss of employment and the receipt, where the primary purpose of the receipt was compensation for the loss of employment. If it can be shown that a payment is in respect of a loss of an office or employment, the payment will constitute a retiring allowance regardless of the fact that the individual's loss of office or employment may occur subsequent to the receipt of such payment.

Where the terms of a separation agreement provide for the severance amount to be paid in the form of salary continuance, the amount will be included in employment income under either subsection 5(1) of the Act alone or together with paragraph 6(3)(b). Accordingly, an amount received as salary continuance would meet the definition of compensation for the purposes of the RPP rules. The determination of whether an employee would be eligible to continue participating in an employer's RPP, however, would require a review of the terms of the particular plan. With respect to the accrual of pensionable service, the employees must continue in an employer/employee relationship with the payer. Pensionable service could accrue over the salary continuance period subject also to the terms of the particular RPP.

Where an amount is received as a retiring allowance, it will be included in other sources of income under subparagraph 56(1)(a)(ii) and, accordingly, will not qualify as compensation for the purposes of the RPP rules.

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