19 January 2010 Internal T.I. 2009-0340931I7 - Termination payments

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: Are payments made by an Employer to an Employee at termination a retiring allowance under the Income Tax Act (the "Act")?

Position: It is a question of fact.

Reasons: The determination of whether 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 through review of all of the details, including the employment contract and any other agreements giving rise to the payment.

									January 19, 2009

	Policy Development Division 				HEADQUARTERS
	SR&ED Directorate						Income Tax Rulings
			   						Directorate
	Attention : Hélène Marquis				Brenda White
			519-645-5454

									2009-034093

Technical Interpretation Request - Payments for termination of an Employee

This is in response to your Memorandum of September 11, 2009 inquiring about the taxation of certain types of termination payments. Your referral is in respect of an enquiry from the XXXXXXXXXX Tax Services Office (TSO).

Based on information received, we understand that in connection with a corporate restructuring, the taxpayer (the "Employer") has terminated many of its employees (the "Employees") and as a result has paid various types of termination payments. As we understand it, the payments can be summarized as follows:

Employees eligible to retire who commenced receiving pension benefits under the Employer's pension regime: These Employees received two main types of payments. Firstly, they could elect between a lump sum payment representing XXXXXXXXXX -months base salary or a period of salary continuance during which they would receive XXXXXXXXXX -months salary by remaining on payroll with the continuation of benefits including vacation and pension accruals. This incentive payment was provided in return for the employee's decision to retire and in recognition of current circumstances. We understand that the Employee was not required to report to work during this period of salary continuance. Secondly, upon actual termination of employment, these Employees would also receive a lump sum payment, determined by age, years of service and salary level, which has been called a transitional retiring allowance (a "TRA").

Employees eligible to retire but who deferred commencement of pension benefits: These Employees received only a lump sum payment (net of statutory deductions) comprised of (i) an amount in recognition of past service and to compensate for loss of employment as well as (ii) the amount required under employment standards legislation for pay-in-lieu of notice. They also received a separate payment representing accrued vacation leave.

Employees not eligible to retire: These Employees received a lump sum payment (net of statutory deductions) comprised of (i) an amount in recognition of past service and to compensate for loss of employment as well as (ii) the amount required under employment standards legislation for pay-in-lieu of notice. They also received a separate payment representing accrued vacation leave.

Our Comments

A "retiring allowance" as defined in subsection 248(1) of the Income Tax Act (the "Act") includes an amount received, on or after retirement, of a taxpayer from an office or employment in recognition of the taxpayer's long service or an amount received by a taxpayer in respect of a loss of his or her employment. The words "in respect of" denote a connection between the loss of employment and the subsequent receipt.

As discussed in paragraphs 5 and 6 of IT-337R4 Retiring Allowances, a loss of employment usually refers to the elimination or expiration of a particular office or employment. A loss of office or employment may also refer to the loss of an income source of an employee who is released from an office or employment whether unilaterally or not.

Where benefits such as registered pension plan benefits and vacation leave continue to accrue to the individual, this indicates that there is an ongoing employment relationship, since such benefits only accrue to employees. This means that payments, such as those described above as "salary continuance," are taxable as employment income under subsection 5(1) of the Act. The fact that the employer does not require an individual to report to work is not, by itself, determinative of whether the individual has retired. As indicated in paragraphs 14 and 15 of IT-337R4, payments representing accrued vacation leave and pay-in-lieu of notice are also taxed as employment income.

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 judgment giving rise to the payment.

Based on the information provided to us for review, we agree with the conclusions expressed in your Memorandum.

We trust the above general comments will be of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch