14 January 1993 Income Tax Severed Letter 9238205 - 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.

• 5- 923820 XXXXXXXXXX M.P. Baldwin
• (613) 957-8953

Attention: XXXXXXXXXX
January 14, 1993

Dear Sirs:

Re: Retiring Allowance

• This is in reply to your letter of December 8, 1992 in which you request our opinion on whether different alternatives offered in a severance package would be considered a retiring allowance or employment income.
• The situation given in your letter appears to be an actual fact situation and as noted in Information Circular 70-6R2, we do not express opinions on specific proposed transactions other than as a reply to an advance income tax ruling request. As a consequence thereof, we may only offer the following general comments.
• Retiring allowance is defined in subsection 248(1) of the Income Tax Act (the "Act") to mean an amount received by an individual upon or after retirement from an office or employment in recognition of one's long service or in respect of a loss of office or employment. It is a question of fact whether an individual has suffered the loss of an office or employment.
• As stated in paragraph 8 of Interpretation Bulletin IT-337R2 "to be considered as a retiring allowance (and a deductible outlay to the payer), a non-gratuitous amount and, in the case of a non-arm's length payment, a gratuitous amount, must be reasonable in the circumstances having regard particularly to the length of service involved, its relationship to the remuneration received for those years of service, and the value of pension and other retirement benefits to which the retiree is entitled in respect of that service."
• The Department has taken the position that a payment in lieu of earnings for the period of reasonable notice which is made by virtue of the terms of an employment contract (whether explicit or implied) will be treated as employment income and not as a retiring allowance. Such a payment can be distinguished from a payment in respect of loss of employment by reason of the purpose of the payment. The purpose of a payment made in lieu of earnings is to replace earnings which would otherwise have been earned under the contract of employment while a payment in respect of a loss of office is intended to compensate for that loss.
• With respect to the continuation of benefits, the Department has taken the position that in a case where pension benefits continue to accrue or normal employee benefits continue to be enjoyed by an individual, it is unlikely that employment has ceased even though the individual is not required to report to work. Amounts received during this period of leave from employment would not be considered a retiring allowance, nor would they qualify for a tax-free transfer to the recipient's registered retirement savings plan ("RRSP") under subsection 60(j.1) of the Act. If, however, the employer has entered into an approved downsizing program in accordance with section 8505 of the Income Tax Regulations, the awarding of additional lifetime benefits under the pension plan will not, in itself, be regarded as an indication of continued employment.
• Generally, where CPP and UIC are deducted the payments made by the employer would be in the nature of salary and would not be considered an eligible retiring allowance.
• With respect to the alternatives given in your letter, it is our opinion that only Alternative 1 would be considered a retiring allowance and that the other alternatives would be considered employment income.
• We trust that the above comments will be of assistance to you.

Yours truly,

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