20 December 1995 Internal T.I. 9530037 - SEVERANCE PAY AS A RIGHT\THING, NOT DEATH BENEFIT

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:

severance pay as a right or thing rather than as a death benefit

Position:

death benefit

Reasons:

while severance pay is paid out to an RCMP officer or his/her estate in most situations resulting in the discharge, it is not a certainty in that there are situations such as dismissal for cause or imprisonment in which it would not be paid. As a result, it does not vest with the employee and cannot be considered a right or thing.

		December 20, 1995

	Saskatoon Tax Services	HEADQUARTERS
	Estates and Trusts		A. Humenuk
		957-8953
	Attention: Diane Bergen
		953003

Severance Pay received after death of an Employee

We are replying to your memorandum of November 9, 1995 concerning the taxation of a payment in respect of severance pay received from the R.C.M.P. by the estate of XXXXXXXXXX after his death.

Severance pay is a term used to describe an amount which is often payable to employees upon the cessation of employment. This amount may be paid to employees or to their estate in such cases as resignation, retirement, death, release for incompetence or incapacity, rejection on probation and others as may be applicable. Upon the discharge of an officer from the R.C.M.P., an amount may be payable as severance pay or retirement leave depending on the reason for the discharge, the length of service prior to the discharge and the date upon which the officer joined the R.C.M.P.

It is our understanding that the estate of XXXXXXXXXX received $XXXXXXXXXX after his death as severance pay in accordance with article 3 of Appendix II - 4 - 10 of the R.C.M.P. Administration Manual and that you have proposed to include this amount in the income of the estate as a death benefit. The executors of the estate have suggested that the amount is more properly classified as a right or thing and have included this amount on a separate return for XXXXXXXXXX filed under the provisions of subsection 70(2) of the Act.

As stated in paragraph 2 of Interpretation Bulletin IT-301 "Death benefits - Qualifying payments", the payment in question would clearly fit within the definition of "death benefit" as found in subsection 248(1) of the Act. However, the executor is of the view that it also fits the definition of a right or thing to be included in the income of the deceased rather than that of the recipient. The executor's position is presumably based on the assumption that the amount received by the estate had vested with XXXXXXXXXX prior to his death and would have been taxable to him as a retiring allowance had it been paid to him before his death. Our review of the relevant portions of the Administration Manual (a copy of which is attached) suggests that severance pay does not vest with an officer at any time during the officer's employment. Articles 2 through 10 of Appendix II - 4 - 10 of the Administration Manual set out the conditions under which an amount will be paid to an officer or his or her estate as severance pay. These conditions are also summarized in the excerpt from the R.C.M.P. publication, "After the Gold Watch", which was submitted with your request.

Even though an amount will be paid as severance pay in most situations which result in the discharge of a member from the R.C.M.P., the amount that will be paid as severance pay does not vest with an employee until such time as one of the conditions under which it could become payable has been fulfilled. In order for a right to be vested with the employee, the right must be absolute and not subject to cancellation or forfeiture by any other person although the enjoyment of that right may be postponed until a future date. The fact that the conditions under which an amount would not be payable are less likely to be applicable in respect of a particular employee does not alter the fact that the right to severance pay does not vest with the employee. We note in particular that article 8 of the Administration Manual states that the severance pay will be paid at the discretion of the Commissioner if a member with 10 years or more of service is discharged for reason of dismissal or having been sentenced to a term of imprisonment by a court of law. Since the payment of severance pay is not a certainty, even after an individual has been employed as an R.C.M.P. officer for 10 years, it is our view that the payment in question did not vest with XXXXXXXXXX prior to his death and the amount received by the estate is correctly included in the income of the recipient as a death benefit.

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Enclosure