28 March 1988 Income Tax Severed Letter 5-5635 - [880328]

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.

Peter K. Noack (613)957-8963

March 28, 1988

Dear Sirs:

We reply to your letter of February 15 concerning a proposed payment of a "retiring allowance" as defined in subsection 248(1) of the Income Tax Act (Act) to an incorporated employee of a corporation (X Co.) carrying on a "personal services business" as defined in paragraph 125(7)(d) of the Act.

In the circumstances you describe, the only activity of X Co. from 1981 to 1988 has been to provide the services of its only shareholder to another unrelated corporation (Y Co.).

During 1988 the business of Y Co. was sold to an unrelated purchaser. X Co. did not enter into an agreement to provide services to the purchaser, however, the shareholder agreed to become an employee of the purchaser for 3 years. The shareholder ceased to be an employee of X Co. and resigned from its board of directors.

You ask whether an amount paid to the shareholder upon or after he ceased to be an employee of X Co. would be a "retiring allowance" for the purpose of the Act. If the amount qualifies as a "retiring allowance, you wonder whether paragraph 18(1)(p) would apply to deny X Co. a deduction of that amount from its income.

We prefer to answer questions about the tax consequences of a proposed transaction in the form of an advance income tax ruling taking into consideration all the facts. Nevertheless, we are prepared to make the following general comments.

In circumstances similar to the ones you describe, the shareholder, in our view, would not have retired or have lost his employment as required for the purpose of the definition of "retiring allowance". Since an incorporated employee in the absence of the corporation would reasonably be regarded as an employee of the person to which the services are provided, he could not be considered to have ceased being employed by withdrawing his corporation as a party to a continuing employer-employee relationship.

We hope the above will be of assistance.

Yours truly,

Wayne Douglas

for Director Financial Industries Division Rulings Directorate