1 December 2005 Internal T.I. 2005-0155577I7 - Retiring Allowance

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 voluntary payment made by a non-employer, (the union) to a union member represents a retiring allowance.

Position: No

Reasons: The payment represents a voluntary personal gift to the individual as a result of his status as a union member and would therefore is not considered a payment to "compensate for the loss of employment" as contemplated by subparagraph 56(1)(a)(ii) of the Act.

		December 1, 2005

	Revenue Collections Branch	HEADQUARTERS
	Trust Accounts	Robert Ferrari
	Policy and Technical Services	(613) 957-2138
	25 McArthur Road, Tower C, 9th Floor

	Attention: Kim Scharfe
		2005-015557

Amount Paid by Union to Union Member

In the situation you have described, an individual with health problems was dismissed from his employment. The individual was also a union member and the union incurred legal expenses in representing this individual with respect to a wrongful dismissal suit in order to obtain severance pay. Pursuant to the settlement agreement, the individual was awarded $XXXXXXXXXX 00 and the union was awarded $XXXXXXXXXX for the legal costs it incurred. The individual had never been employed by, or rendered services to the union. Upon receipt of the $XXXXXXXXXX, the union voluntarily paid that amount to the individual.

Issue:

Is the $XXXXXXXXXX voluntary payment by the union to the member, a retiring allowance pursuant to subparagraph 56(1)(a)(ii) of the Income Tax Act (the "Act").

Our Comments:

Interpretation Bulletin IT-337R4 describes a retiring allowance as follows:

A retiring allowance is an amount received on or after the retirement of an employee in recognition of long service or in respect of a loss of an office or employment. The amount, which may be paid by instalments, may be received by the former employee, or after his or her death, by a dependant or a relation or by the former employee's legal representative. (Emphasis added)

In the case of Phillip Overin v. Her Majesty the Queen, 98 DTC 1299, (TCC), the Court suggested the following two-prong test for the purposes of determining whether an amount received was a retiring allowance:

(i) But for the loss of employment would the amount have been received?

(ii) Was the purpose of the payment to compensate for a loss of employment?

The case dealt with the situation where an employee received a payment from the Province of British Columbia after the company he was working for went into receivership and the employee's employment was terminated without notice of termination and without any severance or other pay. The Court's decision supports the position that a payment that does not originate with the employer may, in certain circumstances, fall within the meaning of retiring allowance under subparagraph 56(1)(a)(ii) of the Act. However, the Overin case dealt with an amount paid pursuant to a settlement agreement between a Province and an employee, which stipulated the amount was paid as consideration for the assignment of any claim the employee may have had with respect to his claim for termination pay.

Based on the information you have provided to us with respect to the voluntary payment made by the union to its member, we would not consider the amount to be paid for the purpose of the union to "compensate for the loss of employment". Instead, it would be more reasonable to consider the payment to represent a voluntary personal gift made to the individual as a result of his status as a union member, which we would not consider to represent a retiring allowance as contemplated under subparagraph 56(1)(a)(ii) of the Act.

Randy Hewlett
Manager
Business and Individual Section
Income Tax Rulings Directorate
Policy and Planning Branch