16 October 2008 External T.I. 2008-0285941E5 - 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 lump sum payment made to a senior executive on termination constitutes employment income or a retiring allowance?

Position: Question of fact, only general comments provided.

Reasons: Wording of the legislation. Also, since this is a completed transaction involving a specific taxpayer, the taxpayer should submit all relevant information and documentation to the appropriate tax services office for a determination.

XXXXXXXXXX 								2008-028594
S. Bernards
October 16, 2008

Dear XXXXXXXXXX :

Re: Retiring Allowance

This is in response to your letter of July 7, 2008 requesting our views on whether a payment made by your company to a senior executive following the sale of your company would qualify as a retiring allowance for income tax purposes.

In particular, you described a situation where a senior executive was hired by your company in XXXXXXXXXX and an employment contract was signed setting out the rights and obligations of each party. Under the terms of the employment contract, your company was required to pay a severance to the senior executive in the event your company was sold and the purchaser did not retain the services of the senior executive. Your company was sold in XXXXXXXXXX . The new owner of your company did not wish to retain the services of the senior executive and he was released from your company. A new agreement was signed between your company and the senior executive and the senior executive agreed to release your company from any and all demands in exchange for a lump sum of $XXXXXXXXXX which was reported on a T4 slip.

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer and completed transactions. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. 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 ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Where a payment is received on the termination of employment and the contract of employment either expressly or implicitly provides that the payee is entitled to receive such payment on account of the employer's obligation to pay the employee salary remaining under the contract of employment or for a period coincident with a reasonable period of notice of the termination of the employment, that payment will be deemed by subsection 6(3) of the Income Tax Act (the "Act") to be employment income for the purposes of section 5 of the Act. This position is stated in paragraph 4(c) of Interpretation Bulletin IT-196R2, Payments by Employer to Employee. However, paragraph 14 in IT-337R4, Retiring Allowances, states that in circumstances where the payment can also reasonably be regarded as compensation for loss of an office, it will be considered to be a retiring allowance instead of employment income.

As discussed in paragraphs 5 and 6 of IT-337R4, where an amount is received because of the loss of employment and the purpose of the payment was to compensate for that loss, that amount will generally be considered a retiring allowance. "Retiring allowance" is defined in subsection 248(1) of the Act to include, among other things, an amount received by a taxpayer in respect of a loss of employment of a taxpayer. A loss of employment usually refers to the elimination or expiration of a particular office or employment and includes the loss of an income source of an employee who is released from employment whether unilaterally or not. A retiring allowance is considered to be "other income" under the scheme of the Act and is included in income under subparagraph 56(1)(a)(ii) of the Act.

Where an amount may be viewed as being both employment income and a retiring allowance, paragraph 13 of IT-337R4 indicates that the amount will be treated as a retiring allowance. However, as stated in Income Tax Technical News No. 19, in making the determination, we will generally deny treatment of such payments as a retiring allowance if the employer treats the payments as income from employment for the purposes of computing Employment Insurance premiums and benefits, computing Canada Pension Plan pension accruals or computing eligible years of service under a registered pension plan. The employer should treat payments consistently for purposes of the statutes that are administered by the Canada Revenue Agency.

The determination of whether a lump-sum amount or a portion of a lump-sum amount received by an employee upon or after termination of employment constitutes employment income or a retiring allowance can only be made after a thorough review of all of the details relevant to the particular situation, including the employment contract and any other agreements giving rise to the payment.

We trust that these comments will be of assistance.

Yours truly,

Jenie Leigh
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch