13 September 1994 External T.I. 9419775 - RETIRING ALLOWANCE RCA DOWNGRADE OF POSITION

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. Can a retiring allowance be paid on the downgrading of an employment position.

2. Can an RCA be used to pay the amount.

Position TAKEN:1. No.

2. RCA rules explained.

Reasons FOR POSITION:1. Department position.

2. Routine explanation of law.

XXXXXXXXXX 5-941977

Attention: XXXXXXXXXX

September 13, 1994

Dear Sirs:

Re: Payments on Downgrading of Employment Position

This is in reply to your letter of July 25, 1994 requesting our opinion on the tax consequences of a proposed transaction.

Since the subject of your enquiry relates to a factual proposal, we are unable to provide you with any specific comments on it at this time. Confirmations of the tax implications in particular proposals may only be provided by this Directorate where the transactions are the subject matter of an advance income tax ruling request submitted in the manner set out in the Department's Information Circular 70-6R2. However, while we are unable to address your specific situation, we can offer the following general comments on this topic.

The Department's Interpretation Bulletin IT337R2 (enclosed) discusses the payment of retiring allowances. At paragraph 4 it indicates that retirement or loss of employment does not include the transfer of an employee from one position to another with the same employer. Accordingly any payment made in the circumstances described would not constitute a retiring allowance but could constitute a payment of additional employment income or a payment of an amount to fund benefits that are to be received after a change in services.

A Retirement Compensation Arrangement or RCA as defined in the Income Tax Act (the "Act") can be described as a plan or arrangement under which contributions are made by an employer to a custodian to fund benefits that are to be received by a person after or in contemplation of any substantial change in the services rendered by an employee, the retirement of the employee or the loss of an office or employment of the employee. However, it does not include a salary deferral arrangement or "SDA". An SDA is also defined in the Act and can be described as a plan or arrangement under which a person has a right in a taxation year to receive an amount after the end of the year and it is reasonable to consider that one of the main purposes of the plan or arrangement is to postpone taxation of an amount that would otherwise be taxable as salary or wages paid in the year.

In a situation where an amount is paid to a custodian as a consequence of a change in an employee's position, it will be a question of fact whether that amount is a payment in lieu of salary otherwise payable in the year or a payment to fund future benefits. In the first case the amount would be a payment under an SDA and in the latter it would be a payment under an RCA. In either case it would not be a retiring allowance if it is paid in the circumstances noted above.

A deferred amount held under the provisions of an SDA is, in general, taxable in the year of deferral in accordance with the provisions of subsections 6(11) and (12) of the Act. An amount paid to a custodian of an RCA would, on the other hand, be subject to the 50% refundable tax determined in accordance with part XI.3 of the Act. The rules pertaining to RCA's are described in the enclosed guide. However, as the rules pertain to your query we note the following:

payments received by an employee or former employee out of an RCA are brought into income in accordance with paragraph 56(1)(x) of the Act and are reported on a T4-RCA;

Payments paid under an RCA can only be transferred to an RRSP in accordance with paragraph 60(j.1) where those payments are received as a retiring allowance;

Withholding tax payable on amounts paid to an employee or former employee are not offset against the refundable RCA tax as suggested by you. These taxes are treated separately as explained in the RCA guide.

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. They 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
Policy and Legislation Branch