1997 Ruling 9640033 - : 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.

Principal Issues:

Payment of a retiring allowance by a corporation to its employee who is the owner.

Position:

The payment is a retiring allowance which may be transferred to an RRSP within the limits set by the Act.

Reasons:

The payment is made to an employee in respect of a loss of an office and employment.

XXXXXXXXXX

Attention: XXXXXXXXXX

Dear Sirs:

Re: XXXXXXXXXX

Advanced Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX, as supplemented by your letter dated XXXXXXXXXX, wherein you requested certain advance income tax rulings (the "Rulings") on behalf of XXXXXXXXXX

We have been advised that to the best of your knowledge and that of XXXXXXXXXX, none of the issues involved herein are being considered by a Tax Services Office or Taxation Centre of Revenue Canada in connection with a tax return already filed and that none of the issues are under objection or appeal.

Facts and Proposed Transactions

• XXXXXXXXXX is the sole shareholder and director and is the president of XXXXXXXXXX.
• XXXXXXXXXX birth date is XXXXXXXXXX social insurance number is XXXXXXXXXX.
• XXXXXXXXXX resides at XXXXXXXXXX.
• XXXXXXXXXX is a Canadian-controlled private corporation pursuant to the meaning assigned to that term by subsection 125(7) of the Income Tax Act (the "Act").
• XXXXXXXXXX head office and principal place of business is located at:

XXXXXXXXXX

• XXXXXXXXXX tax services office is at XXXXXXXXXX and it's taxation centre is at XXXXXXXXXX. It's account number with Revenue Canada is XXXXXXXXXX.
• XXXXXXXXXX was incorporated under the XXXXXXXXXX to carry on the business of XXXXXXXXXX.
• At the time of incorporation the shareholdings of XXXXXXXXXX were:

XXXXXXXXXX

That being all of the issued and outstanding shares of XXXXXXXXXX at that time and today.

• XXXXXXXXXX managed the business of XXXXXXXXXX started to work for XXXXXXXXXX as an employee in XXXXXXXXXX and has continued working for XXXXXXXXXX in various capacities till the present.
• XXXXXXXXXX received her husbands shares of XXXXXXXXXX upon his death pursuant to Section 73(1) of the Act.
• The XXXXXXXXXX assets and goodwill were sold to an arm's length company on XXXXXXXXXX. The land and buildings on which the business was conducted were retained and leased to the purchaser of the business assets.
• In XXXXXXXXXX the land and buildings were sold with XXXXXXXXXX taking back a mortgage on the balance of sale. During this time and subsequent, XXXXXXXXXX invested in a few other mortgages.
• Due to the lenders defaulting on their loans, XXXXXXXXXX foreclosed on the balance of sale agreement as well as some of the mortgages. This resulted in XXXXXXXXXX owning several rental properties.
• Following the foreclosures, XXXXXXXXXX actively leased and managed the properties owned by XXXXXXXXXX, collecting the rents and arranging for any needed repairs and maintenance. She also arranged or tried to arrange for the sale of the properties. All the properties were sold and as of XXXXXXXXXX year end, the only assets owned by XXXXXXXXXX were cash, term deposits, mortgages receivable and an interest bearing loan receivable, the whole totalling approximately $XXXXXXXXXX.
• XXXXXXXXXX has never made any contributions to a pension fund or profit sharing plan on behalf of XXXXXXXXXX, nor has it ever paid XXXXXXXXXX a retiring allowance.
• The company has paid XXXXXXXXXX salaries and dividends as follows:

Salary Dividend Salary Dividend
XXXXXXXXXX

• The company proposes to pay to XXXXXXXXXX a retiring allowance in recognition of her long and distinguished service to its operations in the amount of $XXXXXXXXXX. This amount is calculated as follows:

XXXXXXXXXX

• XXXXXXXXXX will then liquidate and windup, distributing all of its assets to XXXXXXXXXX as its sole shareholder after paying all of its legal obligations.

Rulings Given

Provided that the above statement of facts and proposed transactions are accurate and constitute complete disclosure of all relevant facts and proposed transactions, the proposed transactions are carried out as described above, our Rulings are as follows:

A. The amount of $XXXXXXXXXX to be paid to XXXXXXXXXX will qualify as a retiring allowance as defined in subsection 248(1) of the Act and will be included in XXXXXXXXXX income in the year of receipt under subparagraph 56(1)(a)(ii) of the Act.

B. The amount of $XXXXXXXXXX paid by XXXXXXXXXX to XXXXXXXXXX as a retiring allowance will be deductible by XXXXXXXXXX in its calculation of its income for income tax purposes in the taxation year paid.

C. XXXXXXXXXX will be entitled to a deduction under paragraph 60(j.1) of the Act to the extent permitted under that paragraph, upon the subsequent contribution of the amount by XXXXXXXXXX to a Registered Retirement Savings Plan of which she is the annuitant.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada and are binding provided that the retiring allowance is paid to XXXXXXXXXX no later than XXXXXXXXXX.

These rulings are based on the Act and the Income Tax Regulations as of the date of this ruling letter without taking into account any future amendments thereto, whether currently proposed or not.

Yours truly

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