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.
XXXXXXXXXX P. Diguer
December 13, 1996
Re: Paragraphs 212(j.1) and 60(j.1) of the Income Tax Act (Canada)
This is in reply to your letter dated November 14, 1995 in which you requested our opinion concerning the following hypothetical situation:
Mr. A has been employed for 40 years with a group of companies (the "Group of companies") which are related pursuant to paragraph 251(2)(c) and subsections 251(3) and 251(3.1) of the Income Tax Act (Canada)(the "Act"). Mr. A is not related to any of the companies in the Group of companies. Mr. A worked in Canada for one of the members of the Group of companies for 15 years and previously worked for companies in the Group of companies that are situated offshore for a period of 25 years. Mr. A will receive pension benefits under a non-Canadian pension plan based on his 25 years of vested service outside Canada and under a Canadian pension plan based on his 15 years of vested service in Canada.
Mr. A will receive a lump sum payment on retirement from his Canadian employer of $ 140,000 (the "Payment") consisting of the following:
i) $ 120,000 as a gratuitous payment in recognition of his long service with the Group of companies and as an incentive for him to accept early retirement.
Determination of this amount is based on a fraction of annual salary at the time of retirement multiplied by the total years of service; and
ii) $ 20,000 lump sum amount in lieu of bridging to time of eligibility for Canada Pension Plan ("CPP") which is all attributable to taxation years during which Mr. A was resident and employed in Canada.
Mr. A will not be a resident of Canada for purposes of the Act at the time he receives the Payment.
You ask for our opinion regarding your interpretation of the application of the Act, as summarized in A to F below, given the situation described in your letter.
In your view:
A. The Payment should qualify as a retiring allowance.
B. The companies in the Group of companies are related for purposes of the Act notwithstanding the fact that certain companies in the Group of companies are not resident in Canada for purposes of the Act.
C. For purposes of subsection 60(j.1)(ii)(A) of the Act, the number of years of service employed by "a person related to the employer" includes the years employed by a non-resident related person.
D. Subject to the restriction in paragraph 60(j.1) of the Act, the amount of retiring allowance exempted from Part XIII tax pursuant to subparagraph 212(1)(j.1)(ii) of the Act is equal to the amount that is transferred by the employer in prescribed form to an RRSP under which the non-resident person is the annuitant.
E. The amount of retiring allowance exempted from Part XIII tax pursuant to subparagraph 212(1)(j.1)(i) of the Act is reduced by the amount transferred to a RRSP pursuant to subparagraph 212(1)(j.1)(ii) of the Act.
F. The Payment would be deductible by the Canadian employer as a business expense.
In summary, the income tax consequences to the recipient of the Payment are, in your view, as follows:
1. Maximum amount eligible for transfer to an RRSP pursuant to subparagraph 212(1)(j.1)(ii) $80,000
2. Computation of amount exempt from Part XIII tax pursuant to subparagraph 212(1)(j.1)(i) assuming $80,000 as computed in 1. above is transferred to an RRSP.
Total retiring allowance $140,000
Less: Amount in lieu of bridging to time of eligibility in CPP 20,000
Less: Portion of balance attributable to taxation years resident and employed in Canada - 15 years ($3,000 X 15) 45,000
Less: Portion transferred into RRSP attributable to taxation years neither resident or employed in Canada - 25 years 50,000
3. Computation of amount subject to Part XIII tax assuming $80,000 as computed in 1. above is transferred to an RRSP.
Total retiring allowance $140,000
Less exempt amounts:
subsection 212(1)(j.1)(ii) amount ( 80,000)
subsection 212(1)(j.1)(i) amount ( 25,000)
Amount subject to Part XIII tax $35,000
The situation outlined in your letter appears to relate to a specific taxpayer and involve actual contemplated transactions. As explained in Information Circular 70-6R2 dated September 28, 1990 ("IC-70-6R2"), assurance as to the tax consequences of contemplated transactions can only be obtained in the context of an advance income tax ruling.
The procedures for requesting an advance ruling are outlined in IC-70-6R2. Nevertheless, we can offer the following general comments.
In general terms, we agree with your conclusions in A, B, C and D above. However, with respect to your conclusion in E above, it is our view that the provisions of subsections 212(1)(j.1)(i) and (ii) of the Act are mutually exclusive such that the amount determined in subparagraph 212(1)(j.1)(i) of the Act is not reduced by the amount transferred to a RRSP pursuant to subparagraph 212(1)(j.1)(ii) of the Act.
With respect to your conclusion in F above, we cannot comment on the reasonableness of the retiring allowance as a whole. Nevertheless, should part of the retiring allowance relate to services rendered outside Canada for which the Canadian employer is not reimbursed by the non-resident employers it does not appear that the payment of the retiring allowance could be considered as having been made or incurred for the purpose of gaining or producing income from a business or property in the Canadian company.
Furthermore, it would appear that the payment by the Canadian company of the part of the retiring allowance which related to the services rendered outside Canada could be considered to be a benefit conferred on another member or members of the corporate group to which the Canadian company belongs.
The foregoing represents our general views with respect to the subject matter of your letter. The foregoing opinions are not rulings and in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990 and the Special Release dated September 30, 1992 are not binding on Revenue Canada, Customs, Excise and Taxation. We apologize for the delay in responding to your request.
Reorganizations and Foreign Division
Income Tax Rulings &
Legislative and Intergovernmental
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