9 November 1995 External T.I. 9523495 - RETIREMENT FOLLOWED BY EMPLOYMENT

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)Whether providing services as independent contractor, sole proprietor, partner, or employee of other corporation can be construed as continued employment or office so as to disqualify payment as a "retiring allowance";

2)deductibility by employer of non-arm's length payment of retiring allowance.

Position:

1)Question of fact although confirmed that employment or office with person described in 60(j.1)(iv) is not for that reason alone considered to be employment or office with an affiliate;

2)should not exceed what is a reasonable amount in an arm's length situation.

Reasons:

Routine except for confirmation on 60(j.1)(iv) situation in 1).

XXXXXXXXXX 952349

Attention: XXXXXXXXXX

November 9, 1995

Dear Sirs:

Re: Clarification of Paragraph 4 of Interpretation Bulletin IT-337R2 (the "IT")

This is in reply to your facsimile transmission of September 1, 1995, in which you ask us to advise whether in our view an individual has retired from or lost an office or employment with respect to several described fact situations. In particular, you wish us to elaborate on the comments contained in paragraph 4(b) of the above-noted IT entitled "Retiring Allowances".

The Rulings Directorate is unable to provide opinions concerning the interpretation of the Income Tax Act (the "Act") as it applies to specific fact situations, except in the context of an advance ruling. The following comments, therefore, are general in nature and are not binding on the Department.

Paragraph 4(b) of the IT reads as follows:

4. Retirement or loss of employment does not include:...(b) termination of employment (other than mandatory retirement) with an employer followed shortly by employment with an affiliate of the former employer.

Where the retirement is voluntary and occurs after long service or where the employer terminates the office or employment, and at the time of retirement or termination arrangements have been made for the individual to become an officer or employee with an affiliate of the former employer, the Department will not consider the individual to have retired or lost an office or employment.

For the purpose of determining whether an individual has an office or employment as contemplated by the IT, the word "affiliate" is intended to be given its broadest meaning and would include any related person (within the meaning of section 251 of the Act) or any associated company, or any company that is a member of a group of companies that do not deal at arm's length notwithstanding that they may not be related or associated for any purpose of the Act. We can confirm, however, that an "affiliate", as that term is used in paragraph 4(b) of the IT, does not include a person who would not otherwise be related or considered affiliated but for the definition of "person related to the employer" contained in subparagraph 60(j.1)(iv) of the Act.

With respect to the several situations described in your letter, it is a question of fact whether an individual will be considered to have continued an employment or office with an employer or one of its affiliates when services are subsequently provided under a new arrangement. The issue of whether an individual is a continuing employee or officer or is an employee or officer of an affiliate, or is an independent contractor, a member of a partnership or a sole proprietor can only be determined after an examination of the terms and conditions of the services to be rendered and the legal relationship among or between the parties.

You also ask for our views concerning the deductibility by the employer of an amount of a retiring allowance paid in a non-arm's length situation.

As stated in the Round Table at the CGA (Quebec) Conference, January 10, 1992, the deductibility, for an employer, of an amount paid to an employee as a retiring allowance is subject to the general provisions concerning the deduction of an expense made or incurred for the purpose of gaining or producing business income if it is reasonable, as provided in section 67 of the Act. The amount paid to the employee must be reasonable in the circumstances, i.e. the employee's length of service, the relationship of the amount of the retiring allowance to the remuneration received for the years of service, and the value of the pension and other retirement benefits to which the employee is entitled in respect of the service. As stated in the 1992 Prairie Tax Conference, in order for the amount of a retiring allowance to be considered reasonable in a non-arm's length situation, it should not exceed the amount that would be considered reasonable in an arm's length situation. Generally, the Department will consider an amount not exceeding the amount eligible for deduction pursuant to paragraph 60(j.1) of the Act in respect of the employee to be a reasonable amount for this purpose.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch