7 September 1994 Internal T.I. 9417427 - RETIRING ALLOWANCE RECEIVED BY AGENT

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 retiring allowance received by law firm is taxable in employee's hands.

Position TAKEN:

Depends whether law firm acting as agent of employee or of employer.

Reasons FOR POSITION TAKEN:

Question of fact.

						September 7, 1994

MISSISSAUGA DISTRICT OFFICE HEAD OFFICE
J. Anderson Rulings Directorate
Director P. Spice
(613) 957-8953
Attention: Mr. Robert Armstrong
Client Assistance
941742

Retiring Allowance Received by Agent

This is in reply to your memorandum of June 24, 1994, which was forwarded to us by Head Office Source Deductions. You ask us to confirm which year a retiring allowance should be reported where it was paid by the employer to the law firm of XXXXXXXXXX in 1993 but has not been paid yet to the employee. You advise that the law firm is the legal representative of the employee and in your view holds the funds as an agent for the employee. Thus, the employee would be considered to have received the retiring allowance in 1993.

The issue involved in this situation does not involve an interpretation of the Income Tax Act, but rather a determination of whether the law firm is an agent of the employee, of the employer or of both. XXXXXXXXXX has indicated in its letters to you of February 3, 1994, April 19, 1994, and May 3, 1994, (copies enclosed with your memorandum) that it represented the employee in a wrongful dismissal suit against the employer. The damages, interest and costs were paid to the law firm in 1993 and no income tax amounts were withheld by the employer at this time. Since the employee received unemployment insurance (UI) benefits the right to which was affected by receipt of the damages, it was necessary to determine the amount of overpayment. The overpayment was finally determined in January 1994 and the overpayment repaid; the law firm then wrote to you asking for an income tax waiver pursuant to subsection 153(1.1) based on a 1994 income tax deduction in respect of the UI benefits repaid. It is their contention that only after they have determined the amount of income tax which must be remitted on behalf of the employer can the funds be paid to the employee. To this point in time they state that they act as agent of the employer in respect of satisfying the employer's obligation to remit the income tax to us.

It is a question of fact whether the law firm is the agent of either or both the employer or the employee but we point out that the fact that the law firm represented the employee in the law suit does not prevent it from being the agent of the employer for purposes of determining and remitting income tax. The employer did not withhold tax but rather paid the gross amount to the law firm in 1993. This supports the contention that the employer intended the law firm to fulfil the employer's statutory obligations at a later time. Retaining the funds until the UI benefit overpayment was determined was not a condition precedent, however, to remitting the tax. It could be argued that the law firm was acting as the agent of the employee for this purpose (in order to reduce the withholding tax based on the employee's deduction for the UI benefit repayment). The employer (or its agent) could have withheld tax on the gross amount in the 1993 calendar year.

We do not find the position of XXXXXXXXXX to be unreasonable in the circumstances described in their letters but can see support for contending that the retiring allowance was received by the employee's agent in 1993. Nevertheless, since the answer is not clear, we tend to favour the position of the taxpayer given that it involves, at most, simply a deferral of taxes.

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch