27 October 1989 Income Tax Severed Letter 5-8580 - [Retiring Allowances]

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.

A. Humenuk Tel. (613) 957-2135

OCT 27 1989

Dear Sirs:

Re: Retiring Allowances

We are replying to your letter of August 25, 1989, concerning a proposed payment to a former employee by an XXXX municipality.

We are unable to comment on the tax implications of a specific proposed transaction except by way of an Advance Income Tax Ruling. The attached Information Circular 70-6R dated December 18, 1978, outlines the procedure for obtaining such a ruling. Please note that our current rate for advance income tax rulings is $65 per hour and the minimum fee has been replaced by a $325 deposit. However, we would like to offer the following general comments concerning the situation you describe.

As we understand the situation, some employees who were working for the municipality on January 1, 1963, will be unable to qualify for the maximum pension benefits available under the XXXX since they have or will retire on account of their age, before providing 35 years of service. The municipality is proposing to augment the retirement allowance paid or to be paid to the affected employees by the amount of the deficiency in the pension benefits to be paid. We will address your questions in the order posed:

1) Will the lump sum payment qualify as a retiring allowance pursuant to subsection 56(1)(a)(ii) of the Income Tax Act (the Act) and if not, what is the nature and tax implications of the payment? It is a question of fact as to whether or not any particular payment will qualify as a retiring allowance as defined in subsection 248(1) of the Act and can only be determined after a complete review of all relevant information and documentation. You have not provided enough details of either this proposed payment or the retirement allowance in place to determine the nature of either payment. As explained in the attached Interpretation Bulletin IT-337R2 "Retiring Allowances", a retiring Allowance must, among other requirements, be received upon or after retirement in respect of long service or be paid in respect of a loss of employment. If the payment meets either of those two conditions and otherwise qualifies, the payment would be regarded as a retiring allowance. If the payment does not meet the conditions of a retiring allowance the amount would likely be considered either employment income or a pension benefit, if paid out of or under a superannuation or pension fund. However, depending on the purpose of the payment and the arrangements made to fund the payment, the amount could also be considered as a payment out of or under a salary deferral arrangement or a retirement compensation arrangement, and be taxed accordingly. We have enclosed a copy of the Retirement Compensation Arrangement Guide for your perusal.

2) Will the payment qualify as an amount available for a contribution to an RRSP? If the payment is a retiring allowance, it will qualify as an amount available for contribution to an RRSP within the limitations of paragraph 60(j.l) of the Act as described in paragraph 12 of IT337R2. However if the draft legislation on pension reform is enacted in substantially the same form as indicated in the April 27, 1989, Department of Finance press release, the limitation in respect of service after 1988 will be $2,000 per year.

3) Would the answer to the above two questions be different if the payment is paid over a period of years rather than as a lump sum? Once an amount has been established to be a retiring allowance, it may be paid out over any period of time and is included in computing the retiree's income as it is received. The amount which is available for transfer to an RRSP under paragraph 60(j.1) of the Act is reduced by any amount claimed under paragraph 60(j.1) in a previous year. Accordingly the total amount available for transfer to an RRSP over a period of years in respect of a retiring allowance from a particular source will not vary if the allowance is paid over a period of years.

4) You have asked for confirmation that the amount should be reported on form T4A in the year of payment, and for confirmation that tax should be withheld in accordance with Regulation 103(4) of the Act unless the funds are transferred directly to the recipient's RRSP. As we do not have sufficient facts to characterize the nature of the payment we are unable to comment on the reporting and withholding requirements in respect of such payment. Should you require assistance in determining the reporting and withholding requirements once you have characterized the nature of the payment, you should contact the Source Deductions Division of your local District Taxation Office.

5) Your letter concerns a proposed payment to be made to an employee who retired on December 31, 1987. You have asked whether the payment would be treated any differently if paid to the present staff members when they retire. Other than the proposed change noted above in question 2) to the limitation described in paragraph 60(j.1) of the Act in respect of service after 1988, we are unaware of any proposed changes to the law which would affect the taxation of amounts such as that which you have described.

We trust our comments will be of assistance to you.

Yours truly,

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

Enclosures