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.
Attention: XXXXXXXXXX
Dear Sirs:
RE: Retiring Allowances
This is in reply to your letter of September 30, 1993, in which you ask us several questions concerning the above-noted subject relating to payments or damages in lieu of reasonable notice of termination. You also ask whether an amount on account of severance pay as required by federal or provincial employment standards legislation is considered a retiring allowance.
Situation 1 and Question 1
You describe the situation where a former employee and employer agree to a severance package which will be comprised of amounts in respect of all claims arising out of statute, common law or otherwise. You then ask if it is necessary for the amounts relating to each claim to be separately identified (e.g. amount relating to statutory notice requirement, amount relating to notice required by employment contract) and whether amounts relating to payments in lieu of such notice must be treated as employment income or a retiring allowance for source deduction purposes.
Answer 1
The Department's position with respect to such amounts is published in Interpretation Bulletins IT-196R2 ("Payments by Employer to Employee" - see paragraph 4) and IT-365R2 ("Damages Settlements and Similar Receipts" - see paragraph 15). To reiterate, 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 implied or explicit) will be treated as employment income and not as a retiring allowance. Requirements of employment standards legislation are terms of the employment contract and, therefore, the payment relating to the legislation's minimum notice requirement is a term of the employment contract. If the parties agree during the negotiations after termination that the employee is entitled to a notice period greater than that provided by employment standards legislation, then a payment in lieu of such additional notice is also employment income since the employee's right to it was an implicit term of the employment contract. Such amounts should be separately identified by the parties as payments in lieu of notice.
Situation 1 and Question 2
In the same circumstances as described above, you ask whether the "discontinuance of benefits" by the former employer would make any difference to our answer.
Answer 2
We believe you are referring to the effect of continuing the regular employment benefits such as dental plan, disability or medical insurance coverage, club memberships, use of a company car, and the like. You may also be referring to continued membership in the employer's pension plan. Whether such benefits are continued or discontinued is only relevant to the issue of whether the employee is still employed or has been terminated or retired. The continuance of employment benefits is one factor which may indicate continuing employment and could cause the payment of a negotiated amount by the employer to the employee to be characterized as employment income and not as a retiring allowance. It would not change our answer to Question 1 since we have already confirmed that the payments in question are considered employment income even where there is no question that the employment relationship has been terminated.
Situation 2 and Question 3
You ask if the whole amount paid by the employer pursuant to a court order resulting from a successful wrongful dismissal suit would be considered a retiring allowance or whether part of it (in an amount equal to the payment in lieu of the employment standards legislation minimum notice period and/or in lieu of the express or implied reasonable notice term of the employment contract) would be considered employment income. You ask the same question with respect to an amount paid by the employer where legal action is only contemplated and not commenced, and where the legal action is commenced but the parties settle out of court.
Answer 3
If the full amount pursuant to the court order or settled between the parties is "in respect of (the) loss of employment", then it is considered a retiring allowance in accordance with paragraph (b) of the definition of "retiring allowance" in subsection 248(1) of the Act. If part or all of the amount consists of a payment in lieu of notice, then it is not an amount in respect of the loss of employment but rather an amount due under the employment contract. It will be considered employment income.
Question 4
You ask us to confirm that an amount paid to a former employee on account of severance pay required under provincial or federal employment standards legislation is considered a retiring allowance.
Answer 4
We recently reviewed the provisions of the Ontario Employment Standards Act, R.S.O. 1980, c. 137, in particular the definition of "severance pay" in section 1 thereof and sections 40a and 58. We concluded that "severance pay" as provided for under that statute would be considered a retiring allowance. We have not done a comprehensive review of other provincial and the federal employment standards legislation and, therefore, decline to express any further opinion on this matter. If characterization of these amounts is a matter of dispute with the Department, the district taxation officials may request our assistance.
We trust the foregoing comments are helpful but note that they are not binding on the Department since they are not given in the context of an advance ruling.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate
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