11 July 1989 Ministerial Correspondence 58104 F - Income Tax Treatment of Payments to Employees on Leave

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.

July 11, 1989

Dear Sirs:

This is in reply to your letter dated May 15, 1989 concerning the income tax treatment of certain payments to employees who go on "pre-retirement leave".

You indicated that the employer company has a long standing policy permitting long service employees to retire early, i.e. before age 65.  Further, early retirement is usually, but not always, at the employee's request.  You advised that employees who retire early normally go on "pre-retirement leave" for a period of up to one year.  Also, until the completion of such leave, the employer continues to pay the employee his normal salary, and to provide normal employee benefits, including those arising from participation in the employer's stock purchase plan and its pension plan.

You also referred to certain tests that may be used in determining whether a master/servant relationship has ceased, and cited certain legal and other sources that discuss the meaning of the words "retire" and "retirement".  In your opinion, the ongoing payments to an "employee" during his period of "pre-retirement leave" represent "retiring allowances" as defined in subsection 248(1) of the Income Tax Act (the "Act"), and would be eligible for transfer to an RRSP under paragraph 60(j.1) thereof.

You asked us whether we agree with your views, and for our comments if we do not.

For your information, we are not prepared to provide interpretations with respect to actual and completed transactions, e.g. in respect of employees who have already gone on "pre-retirement leave".  These may, however, be discussed with officials at your local district taxation office to ascertain their income tax implications.  Further, as indicated in paragraph 23 of our Information Circular No. 70-6R we do not provide written opinions on proposed transactions.  However, we are prepared to provide you with the following general comments.

It is always a question of fact whether an individual has retired or suffered the loss of an office or employment.

We have taken the position that where, in an arm's length situation, a long term employee is discharged or laid-off without any prospect of being rehired, and the employee receives a payment from the employer in recognition of long service or in respect of the loss of his office such payment would be considered to be a retiring allowance.

We find the notion of the continued build up of an individual's pension benefits under an employer's pension plan during the "pre-retirement leave" period incompatible with the view that the individual has retired or suffered loss of an office or employment at the beginning of that period.  Furthermore, an "employee's" continued participation in the company's stock plan and the receipt or enjoyment of normal benefits during the "pre-retirement leave" period would indicate that the employee has not retired but is merely on a leave of absence.

We trust that our comments will be of assistance to you.

Yours truly,

W. Douglasfor DirectorFinancial Industries DivisionRulings Directorate