30 November 1996 Ruling 9715403 - EARLY RETIREMENT REDUCED PAYMENT LUMP SUM RPP

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:

Is an amount paid by an employer to a registered pension plan to reduce or eliminate the early retirement penalty, a retiring allowance or employment benefit?

Position:

It is neither.

Reasons:

Payments are made to the RPP by the Employer. There is no constructive receipt by the employee.

XXXXXXXXXX							3-971540
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

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

You have advised us that to the best of Employer's knowledge 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.

Our understanding of the facts and proposed transactions is as follows:

FACTS

Employer was incorporated XXXXXXXXXX.

Employer's head office and address is: XXXXXXXXXX.

Employer's tax services office is the XXXXXXXXXX Tax Services Office and the taxation centre is the XXXXXXXXXX Taxation Centre.

Employer has in its employ full-time, part-time and temporary employees.

XXXXXXXXXX, the registered pension plan (the "RPP") to which the employees of Employer are members, permit under certain circumstances early retirement at a reduced pension.

Presently some employees are eligible for early retirement at a reduced pension.

As a result of a restructuring which will come into effect on XXXXXXXXXX, Employer is having to reduce its payroll and will be offering a voluntary workforce reduction package (the "Package") to all full-time and part-time employees.

PROPOSED TRANSACTION

The Package provides the employees with either:

the voluntary exit program ("Option A"); or

an early retirement option, for eligible employees ("Option B").

Under Option A, Employer would make a lump sum payment to the employee who is opting to leave the employ under this option, which lump sum amount would be calculated as follow:

$XXXXXXXXXX/year of service subject to a minimum of $XXXXXXXXXX and a maximum of $XXXXXXXXXX;

XXXXXXXXXX weeks salary/year of service, subject to a maximum of XXXXXXXXXX weeks; plus

if requested, pre-payment of health, dental, and term life insurance coverage for a XXXXXXXXXX period for employees currently eligible for these benefits.

The amounts calculated pursuant to this option shall be pro-rated for part-time employees.

Under Option B, Employer would make a lump sum payment to the employee and another lump sum payment to the RPP.

The lump sum payment to the RPP would permit the employee to receive either an unreduced pension or an immediate reduced pension, depending on the particular case. The amount of the pension is dependent upon several variables being the age, years of membership in the RPP and years of service of the employee.

Where the lump sum payment to the RPP is less than the lump sum payment under Option A, then the employee would receive either the difference as a lump sum payment or the amount calculated under subparagraph 7(a)(i) of Option A above, whichever is the greater.

Where the lump sum payment to the RPP is greater than the lump sum payment which the employer would be obliged to make under Option A, the employee would receive a lump sum payment equal to the amount calculated under subparagraph 7(a)(i) of Option A above.

Most employees vacating their position with Employer under either of these options shall leave their position between XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTION

As a result of the restructuring process of Employer's operations, there exists an excess of employees. The Employer believes that it is preferable to deal with the excess by offering employees the option to leave their employment under a voluntary process.

RULINGS GIVEN

Provided that the statement of facts and proposed transactions are correct and constitute a complete disclosure of all the relevant facts and the transactions are completed as proposed, we rule as follows:

A.The lump sum payment by Employer to the RPP under Option B will not constitute a taxable benefit for purposes of paragraph 6(1)(a) of the Income Tax Act.

B.The lump sum payment by Employer to the RPP under Option B will not constitute a retiring allowance within the meaning assigned to that term in subsection 248(1) of the Income Tax Act.

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 payments by Employer to the RPP are effected before XXXXXXXXXX.

These rulings are based on the Income Tax Act 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