25 January 1990 External T.I. 59145 F - 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.

January 25, 1990

Dear Sirs:

Re:  Retiring Allowances

We are replying to your letter of November 23, 1989, concerning the meaning of the phrase "retirement of a taxpayer from an office" as used in the definition of retiring allowance in section 248 of the Income Tax Act (the "Act").

You describe a situation in which a corporation (hereafter called the operating company) has sold its active business and is now itself a holding company with investment assets only.  The 4 unrelated corporations (hereafter called holding companies) each of which holds 25% of the shares in the operating company would like to wind up the operating company in the following manner.

1.     The operating company would declare a dividend equal to the company's retained earnings less amounts to be paid out as retiring allowances.

2.     These dividends would be paid to the 4 holding companies each of which is owned 100% by one of 4 unrelated individuals who in concert manage the operating company as directors and employees. All or part of the dividend would be paid to the holding companies by way of a transfer of the operating company's assets but not necessarily cash.

3.     The directors would then declare that the retiring allowances be paid and would resign their positions as directors of the operating company.

4.     As representatives of the shareholders of the operating company the individuals would appoint their solicitor as the sole director and would instruct him to wind up the affairs of the operating company.

5.     The individuals are and will continue to be directors of their respective holding companies.

It is your view that the amounts paid to the four individuals from the operating company upon their resignation from their positions as directors of the operating company would qualify as a retiring allowance to the extent that the amounts were reasonable in the circumstances and that the amounts so paid would be deductible in computing the income of the operating company.

You have asked for our views on the term "retirement from an office" as used in the definition of retiring allowance in subsection 248(1) of the Act and, in particular, our opinion on the nature of the payment so described.

It is a question of fact as to whether or not any particular amount would qualify as a retiring allowance as defined in subsection 248(1) of the Act, which can only be determined upon review of all the relevant information and documentation.  If you have concerns about a particular situation, you may wish to obtain an advance income tax ruling as described in the attached Information Circular 70-6R "Advance Income Tax Rulings" in respect of a proposed transaction or you may wish to contact your local district taxation office in respect of a completed transaction.  Please note that the current rate for an advance income tax ruling 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 on the issues you have raised.

As stated in paragraph 4 of Interpretation Bulletin IT-337R2, "Retiring Allowances", retirement form an office does not include a transfer from one office to another with the same employer, or termination of employment with an employer followed shortly by employment with an affiliate of the former employer.  An affiliate of the former employer includes, but is not limited to, a related corporation or a company which acquires or continues the former employer's business.

As discussed in our telephone conversation of December 6, 1989 (19(1)/ Humenuk), you would like to know whether, in a situation such as that which you describe, the holding companies would be considered affiliates of the operating company and thus whether the amount received by the individuals would be considered as employment income rather than as a retiring allowance.  It is your view that a holding company would not be considered an affiliate of the operating company provided that it was unrelated to the operating company within the meaning of section 251 of the Act and the transfer of assets did not constitute a transfer of a business.

We respectfully disagree.  Even if the property transferred does not constitute a business, it may be that the employee continues to provide the same or similar services in respect of the property so transferred for the new owner.  If this were the case the employee could not be considered to have retired from his office or employment.

With respect to the issue of whether the operating company would be entitled to a deduction in respect of the amount paid to each of the individuals, it is our view that the former employer would be entitled to a deduction in respect of the amount paid provided that the amount was reasonable in the circumstances and not otherwise prohibited.

We caution that the above noted comments represent our considered opinion on the issues raised and are not binding on the Department.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings Directorate Legislative and Intergovernmental Affairs Branch