1 November 1994 External T.I. 9426035 - 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:

Whether amounts paid upon loss of employment constitute a retiring allowance where benefits continue for a period of time.

Position TAKEN:

Yes

Reasons FOR POSITION TAKEN:

If benefits are continued participation in employer's health plan(medical, dental,etc.) for a restricted time and already provided for in the plan, payments would still qualify as retiring allowance if all other conditions are met.

			5-942603
XXXXXXXXXX			M. Shea-DesRosiers

Attention: XXXXXXXXXX

November 1, 1994

Dear Sirs:

Re: Retiring Allowance
Subsection 248(1) of the Income Tax Act (the "Act")

This is further to your facsimile of May 12, 1994 sent to the North York District Office who forwarded it on October 7, 1994 to our Division for a reply and also further to our telephone conversation (XXXXXXXXXX/Shea-DesRosiers) of October 26, 1994 wherein you requested additional information not raised in your facsimile and your additional facsimile of October 26, 1994.

You have inquired as to whether amounts paid upon loss of employment constitute a retiring allowance and have given an example to that effect. You have asked the Department's position in such situations.

It is the Department's opinion that "severance pay" as provided in the Employment Standards Act would constitute a retiring allowance as defined in subsection 248(1) of the Income Tax Act since it is compensation for loss of employment or recognition of long service and would therefore be eligible for a rollover to a Registered Retirement Savings Plan ("RRSP") by the employee under and to the extent permitted by paragraph 60(j.1) of the Income Tax Act when received by the employer.

With respect to the continuation of benefits in situations of loss of employment, the Department has taken the position that in a case where pension benefits continue to accrue or normal employee benefits continue to be enjoyed by an individual, it is unlikely that employment has ceased even though the individual is not required to report to work. It is the Department's view that amounts received in lieu of earnings during this period of leave from employment would be considered employment income and therefore would not be a retiring allowance.

However, it is the Department's opinion that continued participation in the former employer's health plan (i.e. drug, dental, long term disability plan) for a restricted period of time would not, in itself, indicate that employment has not been terminated, particularly when the employer's plan specifically permits former employees to be covered under the plan. In your example, it is our opinion that the amount of $10,500 paid as severance for the period of April 22-July 28, 1994 would be considered a retiring allowance although some benefits such as participation in the former employer's health plan continue to be paid for the same period. Such a measure, as you stated in our telephone conversation referred to above, had already been provided for in said plan.

As for the amount of $6,750 paid as compensation for long service or loss of employment, you have explained that it is not "salary" per se but an amount paid as a retiring allowance based on the employee's salary. Such amount would, in our opinion, be considered a retiring allowance since it is an amount paid in respect of loss of employment. In your example the employee, having 15 years (1980-1994) of service, would be entitled to transfer up to $30,000 (15 x $2,000) to his RRSP pursuant to paragraph 60(j.1) of the Act. Accordingly, the employee could, in your example, transfer $17,250 ($10,500 + $6,750) to his RRSP if he so chooses.

You have also asked whether a yearly bonus, normally paid to an active employee, is paid to a terminated employee, would constitute a retiring allowance since such an employee would not be entitled to it being no longer employed. If such a bonus is paid at the discretion of the employer and to compensate the employee for loss of employment rather than as remuneration for services rendered during the period of his employment, it could, in our opinion, be considered a retiring allowance. It is, however, always a question of fact to be determined in each situation.

The above comments are not rulings and in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department. We trust however that they will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch

c.c.: Kate Ho, North York District Office
Client Assistance