10 April 1996 Internal T.I. 9604037 - SALARY CONTINUATION, RETIRING ALLOWANCE

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:

Can salary continuation payments qualify as a retiring allowance?

Position:

Yes

Reasons:

Where employment terminates and all significant benefits cease as a result of the termination then payments could qualify as a retiring allowance.

			April 10, 1996

XXXXXXXXXX TAX SERVICES OFFICE HEADQUARTERS
Employer Services M.P. Sarazin
(613) 957-3499
Attention: XXXXXXXXXX
960403

Retiring Allowance Determinations

This is in reply to your Round Trip Memorandum dated January 30, 1996 wherein you requested our comments with regards to the issues raised in three separate letters (hereinafter referred to as "Letter #1", "Letter #2" and "Letter #3") that you received from various clients. Letter #1 was returned with our acknowledgement letter dated January 31, 1996 because it did not involve an interpretation regarding the application of the Income tax Act. With respect to Letter #2 and Letter #3, we will provide you with the following general comments.

Letter #2

In this letter, a taxpayer's position with a company was terminated on August 3, 1995 due to a restructuring of the organization. The taxpayer's participation in the company's pension plan also ceased August 3, 1995. However, under the terms of the termination, the company agreed to:

(a)continue to pay the taxpayer's salary for an additional 16 months, unless prior to the expiration of the 16 months, the taxpayer commences alternate employment. Where alternate employment is found, the taxpayer would be entitled to 50% of the remaining unpaid salary;

(b)provide group medical, dental and vision care until the earlier of December 3, 1996 and the commencement of alternate employment;

(c)provide life, accidental death and dismemberment, and long-term disability benefits until the earlier of October 3, 1995 and the commencement of alternate employment.

The taxpayer has argued that the salary continuance represents a retiring allowance and Canada Pension Plan and Unemployment Insurance premiums should not be withheld from such payments.

The determination of whether a payment or series of payments would qualify as a retiring allowance is a question of fact. In the situation where every significant aspect of employment ends on a specific day and every significant benefit ends on that day, we are of the opinion that the payment or series of payments can reasonably be regarded as an amount received "...in respect of loss of office or employment".

Since the termination agreement specifically states that the termination date is August 3, 1995 and it would appear that all significant benefits ended on that date, we would suggest that these payments could be treated as a retiring allowance. However, amounts paid in respect of vacation pay and pay in lieu of notice are not considered retiring allowances.

With regards to the withholding requirements, we would refer you to paragraph 14 of Interpretation Bulletin IT-337R2 wherein it states "..., a person paying a retiring allowance is required to report the amount paid on form T4A supplementary and to withhold tax therefrom in such amount as is prescribed by Regulation."

Letter #3

In this letter, a taxpayer who worked in a seasonal position was laid-off unfairly for the 1993 season. The taxpayer filed a grievance and the Grievance Settlement Board decided in the taxpayer's favour awarding $33,415.85 for lost wages and interest for the 1993 and 1994 seasons. In addition, the taxpayer was reinstated to her former position for 1995. The taxpayer returned to work for six weeks then retired on July 17, 1995. The taxpayer would like to know if the award would constitute a retiring allowance for purposes of the Act.

In cases of reinstatement of employment on a retroactive basis, the amounts received in settlement of the foregone salary, wages and other benefits are to be treated as income from employment rather than a retiring allowance. This position is consistent with the decision rendered in Gagnon v. MNR (61 DTC 307). This position would also be applicable where reinstatement was awarded but the taxpayer did not return to work for his/her former employer. However, where an award is provided without reinstatement, the amount awarded would probably be viewed as a retiring allowance.

We trust the above comments will be of assistance to you.

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