24 April 1997 External T.I. 9709265 - RE-HIRING AFTER TERMINATION

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:

Effect of re-employment with employer after payment of severance package.

Position:

Payment will not be considered a "retiring allowance" if assurance of new employment existed at time payment was made.

Reasons:

No "loss of employment" or "retirement" where parties have arranged subsequent hiring.

XXXXXXXXXX 970926

April 24, 1997

Dear XXXXXXXXXX:

Re: Meaning of "Retiring Allowance"

This is in reply to your facsimile transmission of April 7, 1997, in which you ask what the time limit is on re-employment when an employer has given an employee a severance package. You also ask us to confirm the tax consequences should the employee be re-employed.

Your query relates to the definition of "retiring allowance" in subsection 248(1) of the Income Tax Act (the "Act") and the Department's position as contained in paragraph 4(b) of Interpretation Bulletin IT-337R2 (the "I.T."). In order for an amount to be considered a "retiring allowance" it must be received "after retirement...from an office or employment in recognition of...long service" or "in respect of a loss of an office or employment". In interpreting these phrases, the Department makes the following statement in the I.T.:

Retirement or loss of employment does not include:...(b) termination of employment (other than mandatory retirement) with an employer followed shortly by employment with an affiliate of the former employer.

This position was recently clarified in Technical News No. 7 (please refer to page 5 of the enclosed copy) as follows:

We did not intend to place a temporal limit on the period after termination of the employment in which an individual could not be hired by an affiliate. Instead, the intention was to deny retiring allowance treatment of payments made by the employer where arrangements have been made for the individual to obtain employment with an affiliate. If there is no assurance or offer of a new employment with an affiliate at the time the individual ceases the employment, then we will consider a loss of employment or retirement to have occurred.

The foregoing positions apply equally to the situation where it is the employer and not an affiliate that offers the subsequent employment.

If retiring allowance treatment is denied, the amount will be considered employment income taxable in accordance with subsection 5(1) of the Act and subject to withholding tax in accordance with subsection 153(1) of the Act. No deduction from the employee's income under paragraph 60(j.1) of the Act will be available with respect to the transfer of any part of the amount to the employee's registered retirement savings plan ("RRSP") and, if such a contribution is made, it will be subject to the employee's RRSP deduction limit. An amount paid to the RRSP in excess of the RRSP deduction limit may be subject to the Part X.1 over-contribution tax.

We trust our comments will be of assistance to you.

Yours truly,

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