19 October 1989 Administrative Letter 58586 F - Retiring Allowance

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.

October 19, 1989

Dear Sirs:

This is in reply to your letter of August 24, 1989.

With respect to a $125,000 payment to be received by an employee who is a client of yours, you cite certain facts and proposals and ask for our opinion on whether the payment would represent a retiring allowance or a payment out of or under an employee benefit plan, a salary deferral arrangement or a retirement compensation arrangement.

We are unable to adequately reply to your query without first reviewing all relevant documentation, including the employment contract and the contractual arrangements with respect to the $125,000 payment and the consulting work.  Where the transaction is proposed, which appears to be the case based on the content of your letter, such a review would be made by this office where the payment and related arrangements are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R.  Where the transaction is actual and completed, such a review would be made by the relevant district taxation office.  We nevertheless offer the following general comments.

The Department's views on whether or not an amount received by an employee is a retiring allowance are set out in Interpretation Bulletin IT-337R2.  As indicated in paragraphs 2, 3 and 4 thereof, the amount must be received upon or after retirement or be paid in respect of a loss of office or employment.  Where an employee is retained as a consultant immediately upon retirement, the question of whether or not the employee has retired or suffered a loss of office or employment can be determined only upon a review of the relevant contractual arrangements.

When an employee retires and the employer pays equal annual amounts to the employee for, say 10 years, such an arrangement would not in and of itself necessarily indicate that the annual amounts received by the employee are not retiring allowances. Where an employer pays an amount to a third party to fund a retiring allowance that is to be paid over a number of years, such an arrangement would normally constitute a retirement compensation arrangement.  Where such is the case, the exception in subparagraph 56(1)(a)(ii) of the Income Tax Act (the "Act") would apply such that the amount to be included in the employee's income for a particular year would be determined under the provisions of paragraphs 56(I)(x), (y) and (z) of the Act.  Where a shareholder of a corporation guarantees for no consideration the payment of amounts to be paid by the corporation, this act alone would normally not represent a payment to a third party to fund the payments.  It is our view that it would represent such a payment, however, if the shareholder received consideration for the guarantee.

A retiring allowance, whether or not received out of or under a retirement compensation arrangement, is required to be included in an employee's income for the year that is the earlier of the year in which the retiring allowance is paid to the employee and the year the employee has constructively received payment thereof.  Constructive receipt in a particular taxation year would occur, for example, where the employee has access to the retiring allowance in the year but simply chooses to receive it in a later year.

We have not previously had the opportunity of determining whether or not the provisions of subsection 245(2) of the Act would apply to the type of transaction discussed above.  We are prepared to do so however should such a transaction be the subject matter of an advance income tax ruling request.

The above comments reflect expressions of opinion only which, as stated in Information Circular 70-6R, are not binding upon the Department.

We trust the above comments will be of assistance.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate