28 July 1997 External T.I. 9717505 - RETIRING ALLOWANCES

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:

Request for ruling on payment of retiring allowance in a given fact situation.

Position:

Provided limited general comments.

REASON:

Submission of a request for an advance income tax ruling must be made in proper form.

XXXXXXXXXX 971750

Attention: XXXXXXXXXX

July 28, 1997

Dear Sirs:

Re: Retiring Allowances

This is in reply to your letter of April 28, 1997, addressed to our Winnipeg Tax Services Office and referred to our office for reply.

In your letter you requested an advance income tax ruling on the treatment of certain amounts as retiring allowances where the amounts are paid in circumstances described in your letter. This Directorate can only provide advance income tax rulings to confirm the tax implications inherent in particular transactions when the transactions are proposed and are the subject matter of a request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Since your request was not submitted in an acceptable manner we can not, at this time, provide any rulings in respect of the specific situation detailed in your letter. However, we can provide the following general comments which may be of assistance to you.

1. The Income Tax Act (the "Act") does not prevent an employer from paying a retiring allowance based on years of service with a former employer. However, the amount of a retiring allowance that an employee may transfer to an RRSP is limited, in part, under paragraph 60(j.1) of the Act by the number of years of service the employee has with the employer paying the retiring allowance or with a person related to the employer.

A wholly owned affiliate of an employer is normally a related employer for the purposes of paragraph 60(j.1) of the Act. However, in applying this position, the Department takes the view that the years of service of an employee with a former employer may only be counted if the former employer was related to the current employer at the time the retiring allowance is paid or at the time the employee commenced employment with the current employer. It is a question of fact whether or not a person is employed by a particular employer at any particular time.

If the above provisions do not apply, the Act also provides that an unrelated employer is deemed to be a related employer if the current employer carried on a business of the prior employer, or if service of the employee with the prior employer is recognized in determining any of the employee's pension benefits.

2. In response to question 10 of the 1992 Prairie Tax Conference the Department indicated that a retiring allowance would be considered reasonable if it does not exceed the greater of:

a. 2 1/2 times the average salary of the recipient for the previous 5 years; and

b. the amount otherwise deductible under paragraph 60(j.1) of the Act.

Consideration may also be given to the payment of amounts that fall outside of these limitations if the amounts can be considered reasonable in the circumstances. Various criteria for this determination are set out in paragraph 8 of the Department's Interpretation Bulletin IT-337R2.

3. As noted above, the amount that may be transferred to an RRSP is limited, in part, under paragraph 60(j.1) of the Act by the number of years during which an employee was employed by the payor or by a person related to the payor. It is the Department's position that if an employee is employed at any time in a year (for example, one day) then the employee was employed during that year. However, as noted above, it remains a question of fact whether a person is employed at any particular time. Furthermore, an officer of a corporation will continue to be employed by that corporation even when the active business operations of the corporation have been terminated.

4. We are not sure what problems you are encountering which can be answered through general comments. IT 337R2 provides detailed explanations and examples of the calculations of amounts of a retiring allowance that may be deducted on transfer to an RRSP. Otherwise, we would be pleased to clarify the amounts that may be transferred in your specific situation if the details of your proposal are provided in the form of an advance income tax ruling submitted as noted above.

We trust these comments will be of assistance.

Yours truly

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

ENC.