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.
Principal Issues:
Whether an amount received as settlement for a wrongful
termination is a "retiring allowance".
Position TAKEN:
No comment.
Reasons FOR POSITION TAKEN:
Actual fact situation - advance ruling required.
XXXXXXXXXX 940976
Attention: XXXXXXXXXX
May 3, 1994
Dear Sirs:
Re: Settlement for Wrongful Dismissal
This is in reply to your letter of April 11, 1994, in which you ask whether an amount to be received by an employee to
compensate him for wrongful termination can be characterized as a "retiring allowance", a term defined in subsection
248(1) of the Income Tax Act (unless as otherwise stated all references to this statute are to the Income Tax Act S.C. 1970-71-72, c. 63 as amended, consolidated to June 10, 1993 - the "Act"). You ask whether an amount equal to the employee's "maximum RRSP annual contribution" for the year can be paid to the employee's registered retirement savings plan (RRSP) by the employer without deducting tax at source.
Your request relates to specific proposed transactions respecting actual taxpayers. As indicated 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.
The determination of the tax consequences resulting from the proposed transactions described in your letter cannot be
made without knowing the nature of the activities and the legal obligations of the parties to the transactions and we
are of the view that a meaningful reply could not be provided without all the pertinent terms of the arrangement.
If the transactions are substantially complete, you may request advice from the district taxation office.
We can, however, offer the following general comments on the topics raised in your query.
A payment due under the employment contract representing wages or salary, or a payment in lieu of notice, is employment income which is taxable under subsection 5(1) of the Act; an amount paid "in respect of a loss of employment", whether or not the amount is damages, is a retiring allowance within the definition cited above.
Enclosed for your information are Interpretation Bulletins IT-196R2 (and the Special Release thereto) and IT-365R2 entitled respectively "Payments by Employer to Employee" (see paragraphs 2 and 3 in particular) and "Damages, Settlements and Similar Receipts" (see paragraphs 14 and 15 in particular).
If the amount is a "retiring allowance", an amount may be transferred to the employee's RRSP in the year the retiring allowance is received from the employer or within 60 days of the end of that year, and a deduction taken to the extent permitted by paragraph 60(j.1) of the Act. To avoid having income tax withheld from the retiring allowance, the
employee can arrange to have the funds directly transferred by the employer to his RRSP. The employee should complete
Form TD2 (Tax Deduction Waiver in Respect of Funds to be Transferred) and give it to his employer.
Please note that the deduction under paragraph 60(j.1) is independent of the deduction for a contribution to an RRSP under subsection 146(5) of the Act. The latter deduction is dependent on the employee's "RRSP deduction limit" for the year which is defined in paragraph 146(1)(g.1) of the Act.
Please refer to the 1993 RRSP's and Other Registered Plans for Retirement Guide (pages 17, 18, 20, 21, 39 and 40 in
particular) concerning these two types of deductions. The Guide is available from your district taxation office.
Although these comments are not binding on the Department we trust they will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
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