14 June 2013 Internal T.I. 2013-0474411I7 - Lump Sum Amount Received in Lieu of Severance

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 deduction is available under 110(1)(f)(v) for a Canadian Forces member serving on a qualifying mission for a lump sum amount received in lieu of severance and prior to release.

Position: It is a question of fact.

Reasons: The amount received will only be included under 110(1)(f)(v)(A) to the extent that it is earned while deployed on a qualifying mission after 2003.

XXXXXXXXXX
2013-047441
Kathryn McCarthy

June 14, 2013

Dear XXXXXXXXXX:

Re: Lump Sum Amount Received in Lieu of Severance

We are writing in response to your e-mail of January 9, 2013, and further to our telephone conversation on April 12, 2013 (McCarthy/XXXXXXXXXX), concerning a lump sum amount received in lieu of Canadian Forces severance pay ("Amount Received").

As a result of a change to the terms of employment, a CF member has three options regarding the payment of his or her severance. A CF member may elect:

1. to be paid an Amount Received for his or her full severance prior to release;
2. to be paid an Amount Received for part of his or her severance prior to release and receive any remaining severance amount at release; or
3. to receive his or her full severance at release.

A CF member's severance is based on one week of pay for each year of eligible service up to a lifetime maximum of 30 years. Eligible service includes the CF member's service on a qualifying mission.

The Canada Revenue Agency has advised you that the Amount Received is taxable as employment income. You have now enquired whether a deduction is available under subparagraph 110(1)(f)(v) of the Income Tax Act ("Act") for the Amount Received.

Our Comments

It is our view that an Amount Received prior to release should be included in a CF member's employment income under subsection 5(1) of the Act in the year received. However, members of the CF are entitled to a deduction under subparagraph 110(1)(f)(v) of the Act with respect to employment income earned while serving on high risk (and certain moderate risk) missions outside Canada. The deduction under subparagraph 110(1)(f)(v) is available for the 2004 and subsequent taxation years; and is limited to the lesser of two amounts:

(A) the employment income earned by the CF member while serving on a qualifying mission; and

(B) the employment income that would have been so earned by the CF member if he or she had been paid at the maximum rate of pay that applied, from time to time during the mission, to a non-commissioned CF member.

Further, an amount will only qualify for the deduction under subparagraph 110(1)(f)(v) to the extent that it is included in computing the CF member's income for the year.

In our view, the Amount Received may be only included under clause 110(1)(f)(v)(A) of the Act to the extent that it is employment income earned while serving on a qualifying mission outside of Canada, after 2003. Since the Amount Received is based on eligible service, including a CF member's service on a qualifying mission, it is reasonable that all or a portion of the Amount Received be given the same income tax treatment as other employment income which is based on service on a qualifying mission. Consequently, an Amount Received that is completely based on a CF member's service on a qualifying mission should be considered to be employment income earned while serving on a qualifying mission. However, if the Amount Received was only partly based on a CF member's service on a qualifying mission, then only the corresponding part of the Amount Received would be considered to be employment income earned while on a qualifying mission. The eligible service of each CF member will have to be reviewed to determine whether any part of the Amount Received by the member is considered employment income earned while serving on a qualifying mission.

However, as outlined above the deduction is the lesser of clauses 110(1)(f)(v)(A) and (B) of the Act and it is our view that the Amount Received would not likely be included under clause (B) as part of "the maximum rate of pay that applied, from time to time during the mission, to a non-commissioned member of the Canadian Forces". Therefore, even if the Amount Received were included under clause 110(1)(f)(v)(A) of the Act, the deduction could be limited by clause 110(1)(f)(v)(B). The following examples have been provided to show how the deduction is impacted by clause 110(1)(f)(v)(B) of the Act.

Example 1:

Employee X has been a CF member since January 1, 2001, and has been serving on a qualifying mission since January 1, 2005. In 2013, Employee X has a taxable salary of $52,000, a taxable allowance of $20,000, and chooses to receive a lump sum amount of $12,000 in lieu of severance. The $12,000 represents $1,000 for each full year of service from 2001 to 2012. Therefore, the total employment income earned by Employee X in 2013 is $84,000.

Amount (A)

Since Employee X has been on a qualifying mission from 2005, $8,000 of the lump sum amount is related to Employee X's service on the qualifying mission. The taxable salary of $52,000, the taxable allowance of $20,000, plus the $8,000 payment in lieu of severance, results in employment income of $80,000 earned by Employee X while serving on a qualifying mission.

Amount (B)

The employment income that would have been so earned by Employee X if Employee X had been paid at the maximum rate of pay that applied, from time to time during the qualifying mission, to a non-commissioned member of the CF is $70,000.

Lesser of (A) and (B)

Employee X's deduction under subparagraph 110(1)(f)(v) for 2013 is limited to $70,000 which is the lesser of amount (A) $80,000 and amount (B) $70,000.

Example 2:

Employee Y has been a CF member since January 1, 2001, and served on a mission from January 1, 2002, to December 31, 2008. However, only Employee Y's service on the mission after 2003 can be considered service on a qualifying mission. In 2013 Employee Y chooses to receive a lump sum amount of $12,000 in lieu of severance, which represents $1,000 for each full year of service from 2001 to 2012.

Amount (A)

Since Employee Y has been on a qualifying mission from January 1, 2004, to December 31, 2008, $5,000 of the lump sum amount is related to Employee Y's service on the qualifying mission. The $5,000 portion of the payment in lieu of severance is the total employment income earned in 2013 by Employee Y while serving on a qualifying mission.

Amount (B)

The employment income that would have been so earned by Employee Y if Employee Y had been paid at the maximum rate of pay that applied, from time to time during the qualifying mission, to a non-commissioned member of the CF is $60,000.

Lesser of (A) and (B)

Employee Y's deduction under subparagraph 110(1)(f)(v) for 2013 is limited to $5,000 which is the lesser of amount (A) $5,000 and amount (B) $60,000.

We trust our comments will be of assistance to you.

Yours truly,

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