29 May 1995 Ministerial Letter 9509078 - MIN TAX ARISING FROM ROLLOVER OF 44,000+ RETIRING ALL

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.

May 29, 1995

XXXXXXXXXX

Dear XXXXXXXXXX:

I am replying to your letter of March 17, 1995, on behalf of your constituent, XXXXXXXXXX concerning the taxation of a severance package he received as a result of a corporate restructuring.

I believe XXXXXXXXXX is referring to the application of the minimum tax provisions of the Income Tax Act in his particular situation. The $44,000 limit on Registered Retirement Savings Plan (RRSP) contributions he mentions in his letter likely refers to the level of contributions which would result in an individual being required to pay minimum tax. Based on the information in XXXXXXXXXX first letter to you, it seems that, under the special rules for amounts received for loss of employment, he could transfer into an RRSP the full amount of the retiring allowance he received as part of his severance package.

When an amount received out of a severance package qualifies as a retiring allowance as defined in the Income Tax Act, the recipient is ordinarily entitled to contribute up to $2,000 for each year of eligible service with the former employer. This is in addition to any amount which the individual is otherwise entitled to contribute to an RRSP.

However, for minimum tax purposes, income is calculated as if the individual were not permitted any deduction for contributions to an RRSP. The minimum tax calculation is then based on the adjusted level of income less a basic $40,000 deduction. The individual must pay the greater of the tax calculated in the regular manner or the tax calculated under the minimum tax rules. Any minimum tax paid in excess of the amount of tax calculated in the regular manner may be applied as a tax credit in any of the next seven years. However, the amount of tax payable after the application of any minimum tax credit carryforward cannot be less than the amount of tax payable for that year as determined under the minimum tax rules. Assuming that XXXXXXXXXX does not have a large RRSP contribution or other deductions which give rise to a minimum tax liability in 1996, he should be entitled to claim any additional tax paid in 1995 as a result of the minimum tax rules against the regular tax payable for 1996.

XXXXXXXXXX seems to imply that he would not have been subject to minimum tax if his former employer had paid him the retiring allowance over two years since the amount received in either year would then be less than the $44,000 level of RRSP contributions which gives rise to a minimum tax liability. He indicates that Revenue Canada does not permit a retiring allowance to be paid in other than one lump sum. Please note that the income tax legislation does not prevent an employer from paying a retiring allowance over a two-year period if the terms of the severance package so stipulate. In addition, there is no provision to prevent an employee from contributing less than the maximum amount to an RRSP in order to avoid the application of the minimum tax rules.

There may be a perception that it is always in the taxpayer's best interest to contribute the maximum amount possible to an RRSP. This is not so where an individual will need to use a portion of those funds for general living expenses in the current year. If an individual will need to withdraw funds in the current year from a tax deferred savings vehicle such as an RRSP or Registered Retirement Income Fund, he or she can reduce the impact of the minimum tax by limiting the amount which is rolled over into an RRSP to that portion of the retiring allowance which will not be needed for current living expenses. When an individual rolls less than the maximum amount directly into an RRSP, additional amounts can still be contributed to an RRSP at the end of the year, provided that the total amount so contributed does not exceed the limits imposed under the RRSP provisions of the Income Tax Act.

XXXXXXXXXX seems to be suggesting that the minimum tax rules be changed so that an individual who receives a severance package will not be subject to minimum tax. As I have explained, the minimum tax provisions are not intended to create an additional tax on retiring allowances; instead, they ensure that an individual does not avoid or defer an unduly large amount of tax by contributing into an RRSP or other investments which provide ample tax incentives. An individual who receives a retiring allowance upon termination of employment can structure his or her affairs to avoid the application of minimum tax. As amendments to the Income Tax Act are the responsibility of the Honourable Paul Martin, Minister of Finance, XXXXXXXXXX may wish to make Mr. Martin aware of his suggestion.

Thank you for bringing your constituent's concerns to my attention. I trust my comments will assist you in replying to XXXXXXXXXX

		Yours sincerely,

		David Anderson, P.C., M.P