21 March 2013 External T.I. 2012-0467221E5 - Retiring allowance converted to ELHT contribution

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: Does an employer have to source deduct from a retiring allowance if some or all of the payment is contributed to an Employee Life and Health Trust?

Position: Yes

Reasons: The retiring allowance is taxable under subparagraph 56(1)(a)(ii) of the Act. The contribution to the ELHT is separate from the retiring allowance and there is no provision in the Act which reduces or eliminates the income tax withholding on a retiring allowance when the allowance is contributed to an ELHT.

XXXXXXXXXX
2012-046722
P. Waugh

March 21, 2013

Dear XXXXXXXXXX,

Re: Pre-retirement payments

We are writing in response to your email of October 25, 2012, concerning the taxation of a lump sum pre-retirement leave payment ("LPLP") made to employees. More specifically, you have enquired whether the employer has to withhold income tax from the LPLP made to a retiring employee if the employee directs a portion or all of the LPLP to an employee life and health trust ("ELHT").

In the situation you described, after 10 years of continuous service, an employee is entitled to the LPLP on retirement which is based on the length of service the employee has with the employer and his/her sick leave entitlement. An employee may contribute a portion or all of his/her LPLP to an ELHT which is administered by the union. The employer is not party to the ELHT other than to make contributions to the ELHT for active employees only. It is our understanding that the portion or all of the LPLP that is being contributed to the ELHT is an employee contribution to the ELHT.

Our Comments

The determination as to whether a lump sum amount, or a portion of a lump sum amount, paid to an employee on retirement constitutes a retiring allowance is a question of fact that can only be determined after all of the facts pertaining to each particular case have been reviewed. Generally, a retiring allowance is subject to income tax.

The CRA's general views concerning retiring allowances are contained in Interpretation Bulletin IT-337R4, Retiring Allowances, a copy of which is available on the CRA Web page at http://www.cra-arc.gc.ca/E/pub/tp/it337r4-consolid/it337r4-consolid-e.pdf. As noted in paragraph 3 of IT-337R4, to qualify as a retiring allowance, a payment must be in recognition of long service or in respect of loss of an office or employment. The term "long service" is usually considered to have reference to the total number of years in an employee's career with a particular employer or with affiliated employers. Further, a payment for unused sick leave credits also qualifies as a retiring allowance.

Based on the information provided, the LPLP is received on retirement and relates to an employee's long service with the employer and sick leave credits. As such, the LPLP would be considered a retiring allowance and subject to income tax withholding. There are no provisions in the Income Tax Act that would reduce or eliminate the income tax withholding on a retiring allowance where the allowance is contributed to an ELHT.

We trust these comments will be of assistance.

Nerill Thomas-Wilkinson, CPA, CA
Manager
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch