28 June 1994 External T.I. 9413245 - 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.

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:

1.Whether interest in respect of a retiring allowance has to be distinguished from the retiring allowance?

2.Whether a retiring allowance paid by instalment is taxed in the year of receipt and is an eligible payment for the purpose of subsection 60(j.1) of the Act?

Position TAKEN:

1.Yes.

2.Yes.

Reasons FOR POSITION TAKEN:

1. 5-933397
2. 931885

		5-941324
XXXXXXXXXX	L. Roy

Attention: XXXXXXXXXX

June 28, 1994

Dear Sir\Madam:

Subject: Retiring allowance

This is in reply to your letter of May 11, 1994 in which you requested our opinion on the tax treatment of severance packages.

All references to statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993 (the "Act").

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2, dated September 28, 1990. Where the particular transactions are completed, the enquiry should be addressed to the relevant district taxation office. The following comments are, therefore, of a general nature only, and are not binding on the Department.

Retiring allowance is defined in subsection 248(1) of the Act to mean an amount received by 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 or not a particular payment qualifies as a retiring allowance. Accordingly, the issue has to be decided on a case-by-case basis having knowledge of all the relevant facts.

However, where an employee terminates his employment with a company by exercising an option available to him under an incentive package offered by his employer, amounts received under the incentive package in respect of a loss of office or employment would normally qualify as a retiring allowance as indicated in paragraph 6 of the Interpretation Bulletin IT-337R2, which is enclosed with this letter. Some exceptions to this rule are included in paragraph 4 of this Bulletin.

Where the employer's incentive package provides that a retiring allowance as defined in subsection 248(1) of the Act is payable over more than one year, it is taxable in the year of receipt pursuant to subparagraph 56(1)(a)(ii) of the Act.

Therefore, if the retiring allowance is paid in instalments over a number of years, the recipient is not prohibited from designating an amount in any or all of the years the instalments are included in his income, as long as the total amount designated does not exceed the maximum permitted pursuant to paragraph 60(j.1) of the Act.

With respect to interest on a retiring allowance payable, it is our view that any amount calculated as interest on a retiring allowance is characterized as interest and is not transferable to an RRSP.

With respect to the deductibility, for the employer, of an amount payable to an employee as a retiring allowance, it is subject to the general provision concerning the deduction of an expense made or incurred for the purpose of gaining or producing business income, if it is reasonable, as provided in section 67 of the Act. Thus, the amount payable to the employee must be reasonable in the circumstances considering the employee's length of service, the relationship of the amount of the retiring allowance to the remuneration received for the years of service and the value of the pension and other retirement benefits to which the employee is entitled in respect of the service.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate