29 November 1995 Internal T.I. 9526660 - RETIRING ALLOWANCES

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:

Various issues relating to definition of "retiring allowance" and 60(j.1) deduction.

Position:

1) Continuing to carry out certain duties for passive holding corp w/o pay will not constitute continuing employment or office; 2) Employment with affiliate "shortly" after termination o.k. if no new employment at time of termination and payment; 3) where any part of years of service with former employer recognized under current employer's pension plan, all year of service with former employer can be included in calculation under 60(j.1); 4) "Vested" pension benefits means that the employee will receive either periodic or lump sum which includes part or all of employer contributions.

Reasons:

Analysis of relevant provisions.

Retiring Allowances

Since the publication of Interpretation Bulletin IT-337R2, Retiring Allowances, and ATR-12, Retiring allowance, we have received and replied to a number of requests for interpretations which expand on or clarify statements in both publications. The following is a summary of recent positions we have taken relating to the interpretation of the definition of "retiring allowance" in subsection 248(1) of the Act and the deduction for an amount of a retiring allowance paid into a registered retirement savings plan (RRSP) pursuant to paragraph 60(j.1) of the Act.

(a)Administrative duties. Paragraph 4(a) of IT-337R2 and paragraph 4 of ATR-12 indicate that an individual may be considered to have retired or lost an employment or office even though the individual continues as a director with the corporate employer at nominal compensation. This usually occurs in cases of closely-held corporations.

It is also our position that where an individual retires from all employment and offices on the sale of all the employer's active businesses but agrees to carry on certain administrative duties for the employer for which no remuneration or director's fees will be received, the individual may still be considered to have retired or lost the employment or office. Duties which have been considered not to jeopardize the retirement or loss include collecting rents, hiring trades for general maintenance of a building, day-to-day banking, and general bookkeeping. This position is consistent with the reasoning in John Maxwell Henderson v. M.N.R, 91 DTC 1116, (1991) 2 C.T.C. 2048 (TCC).

(b)Employment affiliate. Paragraph 4(b) of IT-337R2 states that if an employee is employed by an affiliate of the former employer "shortly" after termination, a retirement or loss of employment will not be considered to have occurred. We have had numerous requests to clarify what we mean by "shortly" in this context.

We did not intend to place a temporal limit on the period after termination of the employment in which an individual could not be hired by an affiliate. Instead, the intention was to deny retiring allowance treatment of payments made by the employer where arrangements have been made for the individual to obtain employment with an affiliate. If there is no assurance or offer of a new employment with an affiliate at the time the individual ceases the employment, then we will consider a loss of employment or retirement to have occurred.

(c)Person related to the employer - paragraph 60(j.1). For purposes of the deduction, the eligible amount of a retiring allowance contributed to a RRSP is calculated by reference to the aggregate number of years the retiree was employed by the employer paying the retiring allowance and years employed by "a person related to the employer".

Recently, we clarified our position concerning the number of years of service which may be counted where the former employer is deemed to be related through recognition of such former employment under the current pension plan. Where the employer's pension plan recognizes any part of the service with the former employer, then all the years of service with the former employer can be included in the total number of years for purposes of calculating the eligible amount of the retiring allowance.

(d)Vesting. The eligible amount of a retiring allowance is basically $2000 times the number of years during which the retiree was employed by the employer or a person related to the employer. (As you know, the February 27, 1995 Budget proposes to limit the formula to exclude years of service after 1995.) An additional $1500 is eligible for the deduction under paragraph 60(j.1) of the Act for each year before 1989 in respect of which employer contributions under either a pension plan or a deferred profit sharing plan had not "vested in the retiree at the time of the payment". The word "vested" has been the subject of many requests for interpretation.

In our view, there is no vesting if, at the time the retiring allowance is paid, the employee is not entitled to either a pension or a lump sum amount which includes the employer contributions.