14 November 1997 External T.I. 9728365 - RETIRING ALLOWANCE UNINCORPORATED BUSINESS

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:

1. For 60(j.1), does employment include:

a.employment with an unincorporated business of a related person;
b. a period carrying on a business as a partner or a proprietor;
c. employment with a wholly owned corporation

2. Must service be continuous?

Position:

1.a. Yes; b. No; c. Yes. 2. No

Reasons:

The requirement in 60(j.1) is to be employed by the business. An individual can not employ him/herself when one owns an unincorporated business.

972836

XXXXXXXXXX Franklyn S. Gillman, LL.L., C.A.

Attention: XXXXXXXXXX

November 14, 1997

Dear Sirs:

Re: Retiring Allowance

This is in reply to your letter dated October 24, 1997 wherein you requested our views as to whether an employee can receive a retiring allowance from a business in a situation where the employee after being employed by an unincorporated business for several years acquired ownership of the business, incorporated the business and worked as an employee for a number of years until retirement.

The situation described in your letter appears to be an actual fact situation related either to a past transaction or to an actual proposed transaction. If the situation described relates to an actual transaction which has already been implemented, the review of such transactions falls within the responsibility of the Tax Services Offices and it is the practice of this Directorate not to comment on such transactions. If, however, the situation described relates to an actual proposed transaction, it should be the subject of an advance income tax ruling. Should this be the case, your query should take the form of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R3 dated December 30, 1996. As expressed at paragraph 7 in the Information Circular, the Department will not express opinions on definite transactions that are being proposed other than by way of an advance income tax ruling, nor will the Department provide rulings on completed transactions. However, we are prepared to provide you with the following general comments.

Comments

The determination of whether there is a loss of employment and whether a payment would qualify as a retiring allowance is a question of fact which can only be determined after a review of all of the relevant facts.

Retiring allowance is defined in subsection 248(1) of the Income Tax Act (the "Act") to mean an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee and a benefit in respect of counselling services for the re-employment or retirement of the employee) received upon or after retirement from an office or employment in recognition of one's service or in respect of a loss of office or employment.

The amount of the retiring allowance for which a deduction is available under paragraph 60(j.1) of the Act is equal to $2000 times the number of years of employment before 1996 with the employer paying the retiring allowance and with a former employer who is related to the payer. An additional $1500 per year for those years of employment before 1989 is available where employer contributions to a pension plan or deferred profit sharing plan had not vested in respect of those years at the time the retiring allowance is paid. It is our view that the years of service with the particular employer may be either continuous or discontinuous.

We note that subsection 60(j.1) of the Act refers to the "number of years during which the employee... was employed by the employer or a person related to the employer." A person is related to the employer if it satisfies the criteria in section 251 or subparagraph 60(j.1)(iv) or (v) of the Act. Thus, if the current employer acquired the business, the two employers will be related for purposes of paragraph 60(j.1) of the Act.

Therefore where individual A is first employed by an unincorporated business for several years and then acquires ownership of the business and subsequently incorporates the business, it would be our view that for purposes of determining the number of years of employment that would qualify under paragraph 60(j.1) of the Act, there would be included the years employed in the unincorporated business prior to individual A acquiring ownership of the business and the number of years individual A was employed by the incorporated entity.

These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case. As stated in paragraph 22 of Information Circular 70-6R3 written opinions are not advance rulings and, accordingly, are not binding on the Department.

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