6 September 1991 Ministerial Correspondence 911884 F - Lump Sum Payment - Termination of Employment

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.

Dear Sir:

Re:  Lump Sum Payment - Termination of Employment

This is in reply to your letter of July 4, 1991 in which you requested that we review the tax treatment given to a lump sum payment received by you in the 1988 taxation year.

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You enclosed with your letter a photocopy of a page from the Canadian Tax Reports which includes a paragraph containing comments supporting a tax-free treatment of a payment on termination of employment.  The comments are supported in turn by a number of cited court decisions.  You have asked us to review the payment in question with a view to confirming its tax status.

The legislation governing the treatment of payments received upon termination of employment has changed over the past twenty years.  In the early seventies the legislation consisted of the inclusion in income of a "retiring allowance" as that term was then defined in the Income Tax Act (the "Act").  The Court cases of that time period, including the ones cited in the paragraph you submitted, distinguished between payments on retirement or severance and payments as damages for wrongful dismissal with the latter being found to be non-taxable.  As a response to these Court decisions the Act was amended, effective for terminations after November 16, 1978, to introduce the term "termination payment".

The amendment had the effect of including in income (applying a specific formula) payments in respect of damages for wrongful dismissal that were not otherwise considered to be a retiring allowance.

The legislation was further amended effective for terminations after November 12, 1981, by repealing the defined term "termination payment" for tax purposes and concurrently amending the definition of a "retiring allowance".  The latter definition now incorporates some of the wording previously found in the repealed definition.  The term "retiring allowance" now includes payments "...in respect of loss of an office or employment of a taxpayer, whether or not received as on account of or in lieu of damages or pursuant to an order or judgement of a competent tribunal...".  The paragraph in the Canadian Tax Reports is relevant to the rules in force prior to November 13, 1981.

The Agreement details  24(1)   the various components of payments made to you. For your information, we are prepared to confirm the tax treatment accorded to each such payment.

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We have attached for your further information a copy of Interpretation Bulletin IT-337R2 "Retiring Allowances".  We trust that our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

c.c.  C. Gadbois, Chief of Enquiries and Office Examination Montreal District Office