13 April 1992 Income Tax Severed Letter 9207126 - Ontario Employee Wage Protection Program

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.

April 13, 1992

Other Returns & Guides Division        Financial Industries
                                         Division
                                       P. Spice
G. Levesque, A/Chief                   957-8953
                                       7-920712
Ontario Employee Wage Protection Program
    (the "Program")                     

This is in reply to your memorandum of March 9, 1992, in which you ask whether payments under the above-noted Program could be considered a "retiring allowance" within the meaning of subsection 248(1) of the Income Tax Act (the "Act") and, thus, eligible for roll-over to a registered retirement savings plan ("RRSP") under paragraph 60(j.1) of the Act. Enclosed with your memorandum was a copy of a letter of June 5, 1991, from the Source Deductions Division to the 24(1) which stated that payments in respect of unpaid wages under the Program would be subject to income tax deductions at source but would not be earnings of the employee for purposes of the Unemployment Insurance Act or Canada Pension Plan. You also enclosed a brochure describing some of the Program's features.

We note that the paragraph 60(j.1) deduction is only available for retiring allowances paid by the employer (which is not the situation under the Program) or for an amount paid under a retirement compensation arrangement ("RCA") to which the employer has contributed. The fund from which payments are made under the Program are drawn from general government revenues and, therefore, it cannot be considered a retirement compensation arrangement.

Although most employers will have paid taxes and could be considered to have contributed to general government revenues, the purpose of the contribution of taxes is not, as required by the definition of an RCA in subsection 248(1) of the Act, to provide benefits to employees on retirement, loss of office, or substantial change in the services rendered by the employee.

Even though the paragraph 60(j.1) deduction is not available, we also looked into the issue of whether the payments under the Program constitute retiring allowances and our views on this matter follow.

It is the Department's position that payments in lieu of earnings for the period of a reasonable notice of termination imposed by the terms of the taxpayer's employment (explicit or implied) constitute income but not a retiring allowance. The terms of employment would include requirements imposed by statute.

We reviewed the provisions of the Employment Standards Act, R.S.O. 1980, c. 137, (the "ESA") to determine what was meant by the terms "termination pay" and "severance pay" for purposes of the Employee Wage Protection Program. "Termination pay" is defined in section 1 of the ESA to mean a payment to which an employee is entitled under section 40 of the ESA. Section 40 imposes a minimum number of weeks notice prior to termination which is dependent on the years of employment. During the period of notice, the employee is entitled to receive his regular wages. If the employment is terminated without the written notice required by the ESA, the employee is entitled to termination pay equal to the regular wages payable over the same number of weeks for which notice was required.

In these circumstances, it is our view that "termination pay" received under the Employee Wage Protection Program would not be a retiring allowance. This position is also in accordance with the comments in paragraph 15 of Interpretation Bulletin IT-365R2 which deals with damages, settlements and similar receipts, including amounts received on termination of employment.

"Severance pay" is defined in section 1 of the ESA to mean the amount of pay to which the employee is entitled under section 40a of the ESA. An employee is entitled to severance pay where fifty or more employees have been laid off by the employer within a six month period due to a permanent discontinuance of the business or where an employer with a payroll of $2.5 million or more terminates one or more employees. Furthermore, the employee must have been employed for at least five years with the employer in order to be entitled to the severance pay. The pay is calculated based on one week's regular wages for every year of completed employment and a proportionate amount for each incomplete year. Severance pay may not exceed 26 weeks regular wages.

In our view "severance pay" would constitute a retiring allowance within the meaning of subsection 248(1) of the Act since it is compensation for loss of employment. The employment relationship is severed before the employee is entitled to the pay, whereas termination pay constitutes the continuation of regular salary payments notwithstanding the termination of employment.

We wish to advise that there are separate trust funds which can arise under the Ontario Employee Wage Protection Program which are not described in the brochure you sent us. They arise when termination pay and severance pay are paid by the employer to the Director of Employment Standards to be held for the benefit of employees who have been temporarily laid off and are subject to recall. The payments are returned to the employer if the employee is recalled within a certain period of time, or are paid to the employee if the employee forgoes his right to recall or has not been recalled at the expiry of the time period. In our view these separate funds would constitute RCA's and, therefore, severance pay out of such a fund could be contributed by the employee to an RRSP and a deduction taken under paragraph 60(j.1) of the Act.

                               24(1)

We hope the foregoing comments are helpful.

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

              EMPLOYEE WAGE PROTECTION PROGRAM

        (Part XII-A of the Employment Standards Act)

Wages for which employee may be compensated under the Program are regular wages, including commissions, overtime wages, vacation pay, holiday pay, termination pay and severance pay (40b(2)(a) of the Act).

The amount of termination pay for which employee may be compensated is amount in subsection 40(7) (40b(6) of the Act).

The amount of severance pay for which employee may be compensated is amount in subsection 40a(1c) (40b(7) of the Act).

"Termination pay" means the amount of pay to which an employee is entitled under section 40 (s. 1(o) of the Act - definitions for the Act).

"Severance pay" means the amount of pay to which the employee is entitled under section 40a (s. 1(na) of the Act - definitions for the Act).

                  Termination of Employment
               (Part XII of Act - section 40) 

No employer can terminate unless he gives a certain number of weeks' notice in writing to the employee. During the period of notice the employee is entitled to receive his regular wages. If employment is terminated without notice, the employer shall pay termination pay in an amount equal to the regular wages the employee would have been entitled to under the required notice period.

                        Severance Pay
               (Part XII of Act - section 40a)

Where fifty or more employees laid off in less than six months due to permanent discontinuance of business or one or more employees terminated and employer payroll is $2.5 million or more

employer shall pay severance pay to each terminated employee who has been employed for five or more years.

Severance pay equal to regular wages per week multiplied by sum of: (a) the number of completed years of employment; and (b) the number of completed months of employment divided by 12.

Severance pay not to exceed 26 weeks of regular wages.

                     General Provisions

Subsection 7(5) deems every contract of employment to include a provision requiring severance pay and termination pay to become payable by employer in two weekly instalments beginning with the first full week following termination of employment.

If the employee is temporarily laid-off (defined in the Regulations to the Act), he may forego payment of severance pay and termination pay. If he elects to receive pay immediately, he gives up the right to be recalled.

P. Spice - Summary of Legislation in force as at December 1991

Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information