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 a payment in lieu of working notice is a retiring allowance or employment income.
Position TAKEN:
It's employment income.
Reasons FOR POSITION TAKEN:
Routine
June 24, 1994
Ottawa District Office Rulings Directorate
P. Middlestead, Director P. Spice
(613) 957-8953
Attention: Mr. Marc Latremouille
Source Deductions
941610
XXXXXXXXXX Workforce Reduction Payment
This is in reply to your facsimile transmission of June 21, 1994, in which you ask us to comment on a letter of June 10, 1994, from XXXXXXXXXX which describes a payment to be made to employees upon termination of their employment with XXXXXXXXXX has asked us to confirm whether this payment would be considered a "retiring allowance" as 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").
As we advised in our telephone conversation of June 22, 1994 (Spice/Latremouille), the Rulings Directorate cannot comment on the tax consequences respecting actual fact situations except in the context of an advance ruling. We are therefore directing our comments to you to assist you in your reply to the client.
The payment in question is described in the XXXXXXXXXX letter as a " XXXXXXXXXX ".
Interpretation Bulletin IT-196R2 ("Payments by Employer to Employee"), para. 4(c), states that subsection 6(3) applies to "a payment received on the termination of employment, where the contract of employment either expressly or implicitly provides that the payee is entitled to receive such payment on account of, in lieu of payment of, or in satisfaction of the employer's obligation to pay his salary, wages, commissions, etc. remaining under the contract of employment or for a period coincident with a reasonable period of notice of the termination of his employment." (Emphasis added).
If the parties agree during negotiations before or after termination that the employee is entitled to a certain notice period, then a payment in lieu of such notice is employment income since the employee's right to it was an implicit term of the employment contract. Even where the payment is not a result of negotiation but is gratuitous, if it is made for the purpose of compensating the employee for the period of notice of termination, it is considered employment income.
We trust these comments assist.
for Director
Financial Industries Division
Rulings Directorate
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