9 January 1997 External T.I. 9641115 - DENIAL OF DOWNSIZING BENEFITS ON RE-EMPLOYMENT

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:

Description of downsizing rules restricting contract work with former employer.

Position:

Described Regulation 8505(2.1).

Reasons:

Appears to be the rules to which the writer is alluding.

XXXXXXXXXX		964111

January 9, 1997

Re: Restriction Against Former Employee Providing Services
Through a Consulting Firm or Contracting Agency

This is in reply to your letter of November 28, 1996, in which you ask whether you would be in conflict with any pension regulations if you are employed by an independent company which wishes to have you work on a contract it has with
XXXXXXXXXX.

Your question relates to an interpretation of the Income Tax Act (the "Act") and Income Tax Regulations with respect to a particular employer and its restructuring and downsizing program and we are unable to provide an opinion that would bind the Department except in the context of an advance income tax ruling. Furthermore, the interpretation you request appears to relate to circumstances as they existed at the time of your termination of employment and advice on past transactions must be obtained from your tax services office. We may offer, however, the following general comments which we hope will assist.

Enhanced pension benefits are available in accordance with section 8505 of the Income Tax Regulations (the "Regulations") if an employer enters into a downsizing program which has been approved by the Department. We are not aware if XXXXXXXXXX has entered into such an approved downsizing program or if these are the "pension regulations" to which they refer in their correspondence with you.

If the downsizing program is approved, an employee who is a "qualifying individual" at the time the employee's employment is terminated can receive certain additional pension benefits. In accordance with subsection 8505(2.1) of the Regulations, an employee is not a "qualifying individual" if at the time of termination it is reasonable to expect that the former employee will become re-employed by the former employer or a person that does not deal at arm's length with the former employer.

Furthermore, an employee is not a "qualifying individual" if, at the time of the termination, it is reasonable to expect a corporation with which the former employee is "connected" will provide services to the former employer or a person that does not deal at arm's length with the former employer and the former employee will be directly involved in the provision of the services. Generally, the former employee is connected to a corporation where he or she together with any person related to the former employee owns 10% or more of the shares of any class of the corporation or a related corporation. See below for a further explanation of the word "connected".

However, if the former employee is reasonably expected to be re-employed or provide services but it is not reasonable to expect that the re-employment or the services will be for a period exceeding 12 months, then the Minister can waive the application of the conditions in subsection 8505(2.1) of the Regulations.

Subsection 8500(3) of the Regulations describes what is meant by the word "connected" as follows:

A person is connected ... at any time where, at that time, the person

(a)owns, directly or indirectly, not less that 10 per cent of the issued shares of any class of the capital stock of the (corporation) or of any other corporation that is related to the corporation,
or

(b)is a specified shareholder of the (corporation) by reason of paragraph (d) of the definition "specified shareholder" in subsection 248(1) of the Act - this paragraph deems an individual to be a specified shareholder under certain circumstances relating to the carrying on of a "personal services business". For more information on this topic please refer to the enclosed Interpretation Bulletin IT-73R4, paragraphs 17 through 20, and, specifically, paragraph 20(d) which describes this particular "specified shareholder" rule.

For purposes of subsection 8500(3) of the Regulations a person is deemed to own each share of the stock of a corporation owned at that time by a person with whom the person does not deal at arm's length and there are similar deeming rules for beneficiaries of a trust which owns the shares, of members of a partnership which owns the shares and with respect to shares which the person has a right to acquire.

Due to the detail and complexity of the Act and Regulations regarding these issues, the foregoing comments are meant only to provide an overview of the relevant provisions and under no circumstances should they be considered either comprehensive or all inclusive.

Although we cannot confirm that these are the regulations to which XXXXXXXXXX is referring, we trust that the foregoing comments are helpful.

Yours truly,

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

Enclosure