10 January 1992 Roundtable, 912225A 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.

ROUND TABLE - CGA - JANUARY 10, 1992

QUESTION #20

Advance ruling ATR-12 indicates, among other things, the maximum deduction that the Department is prepared to allow as a retiring allowance. In the old series of advance rulings the Department had already indicated (see TR-100) that it would allow a maximum amount equal to 2.5 times the retiring employee's average salary over the preceding five years. Is this policy still in force? Moreover, why must RRSP contributions be included in the calculation?

ANSWER

Paragraph 60(j.1) was added to the Act to specify the maximum retiring allowance amount that a taxpayer may transfer tax-free when the employment terminated after November 12, 1981. As a consequence of this amendment, the rule of 2.5 times the average salary is no longer applicable, since any amount greater than the maximum allowed under paragraph 60(j.1) of the Act must be reported in the employee's computation of income for the year in which it was received.

The deductibility, for an employer, of an amount paid to an employee as a retiring allowance is subject to the general provisions concerning the deduction of an expense made or incurred for the purpose of gaining or producing business income if it is reasonable, as provided in section 67 of the Act. To sum up, the amount paid to the employee must be reasonable in the circumstances, i.e. the employee's length of service, the relationship of the amount of the retiring allowance to the remuneration received for these years of service and the value of the pension and other retirement benefits to which the employee is entitled in respect of the service (IT-337R2).