27 October 1994 External T.I. 9427125 - DEFERRAL OF LUMP SUM SEVERANCE PAYMENT

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 severance payments received in instalments are taxable as retiring allowances as received.

Position TAKEN:

Maybe.

Reasons FOR POSITION TAKEN:

Routine - see 931885 re instalments; IT-337R2 re early retirement incentive payments as retiring allowances.

XXXXXXXXXX		942712

Attention: XXXXXXXXXX

October 27, 1994

Dear Sirs:

Re: Deferral of Lump Sum Severance Payments

This is in reply to your facsimile transmission of October 20, 1994, in which you ask whether instalments of a severance payment will be taxable in the year received or if the full amount of the severance payment will be taxable in the first year in which the terminated employee can choose to receive the full amount. You explain that under a voluntary reduction program an employee must choose to receive the severance payment

XXXXXXXXXX

The situation you describe is the subject of an actual proposed transaction and we cannot provide our opinion except in the context of an advance income tax ruling. The following comments are, therefore, general in nature and are not binding on the Department.

A retiring allowance is taxable in the year of receipt pursuant to subparagraph 56(1)(a)(ii) of the Income Tax Act. If it is a term of the employment contract that an employee has the option to take the retiring allowance in instalments or in a lump sum and the option is exercised prior to retirement or termination, then the employee is taxable on receipt of the whole or part of the retiring allowance in the year as received. If it is not a term of the employment contract, the whole amount is taxable in the year it is due regardless of any accommodation by the employer to pay the retiring allowance in instalments over more than one year. An employment contract includes all statutory, written and oral conditions and policies which govern the employment relationship.

You also ask if the severance payment to be received is a "retiring allowance" as defined in subsection 248(1) of the Act. We cannot provide a definitive answer without reviewing the terms for the payment of the severance payment. Enclosed is a copy of Interpretation Bulletin IT-337R2 and we refer you to paragraph 6. It is the Department's general position as stated therein that payments made under early retirement incentive plans are made in respect of a loss of office or employment since such plans are essentially designed to eliminate a number of office or employment positions (albeit on an elective basis). They will, therefore, be considered retiring allowances.

We trust the foregoing comments are of assistance.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch