8 March 1994 External T.I. 9400085 - HAA7278-1 RETIRING ALLOWANCE PAY IN LIEU OF NOTICE

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

DOCUMENT TYPE:Opinion FILE # E9400085

Principal Issues:	Is termination pay in lieu of notice a retiring 	allowance?

Position TAKEN: No

Reasons FOR POSITION TAKEN: Routine answer.

LEGAL:

FINANCE OPINION:

JURISPRUDENCE:

RCT PUBLICATIONS: 1993 CTF Round Table Q34

HAA NUMBER: 7278-1

XXXXXXXXXX 5-940008

Attention: XXXXXXXXXX

March 8, 1994

Dear Sirs:

Re: Payments in Lieu of Notice and Retiring Allowances

This is in reply to your letter of December 23, 1993 in which you requested clarification of the treatment of payments in lieu of notice and retiring allowances under the Income Tax Act (the "Act").

The following comments on payments under the Employment Standards Act (Ontario) (the "ESA") may be of assistance to you:

"Termination pay" is defined in section 1 of the ESA to mean the amount of pay to which an employee is entitled under section 57 of the ESA . Section 57 imposes a minimum number of weeks notice prior to termination which is dependant 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. The termination pay constitutes the continuation of regular salary payments notwithstanding the termination of employment.

In our view, for the purposes of the definition of "retiring allowance" in subsection 248(1) of the Act, a termination pay in lieu of notice received under section 57 of the ESA would not be a retiring allowance, whether or not received in a lump-sum amount. This position is in accordance with the comments in paragraph 15 of Interpretation Bulletin IT-365R2 which deals with damages, settlements and similar receipts, including amount received on termination of employment.

"Severance pay" is defined in section 1 of the ESA to mean the amount of pay to which an employee is entitled under section 58 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 cases of "severance pay", the employment relationship is severed before the employee is entitled to the pay.

In our view, for the purposes of the definition of "retiring allowance" in subsection 248(1) of the Act, a "severance pay" under section 58 of ESA, would constitute a retiring allowance since it is compensation for loss of employment or recognition of long service.

Where an amount is paid by virtue of the terms of an employment contract to compensate an employee for the loss of employment or in recognition of long service, it will normally be considered a retiring allowance. This is not to say that any payment made upon termination of employment will qualify as retiring allowance but rather that a payment of an amount which would otherwise qualify as a retiring allowance will not be disqualified as a retiring allowance solely because it is made pursuant to contractual obligation.

A retiring allowance must be reported on a T4A whether it is transferred in whole or part to an RRSP or taken in cash.

The above comments are based on our understanding of the law as it applies in general and may or may not apply to the circumstances of a particular case. The comments do not form an advance income tax ruling and they are not binding on the Department.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate