13 January 1998 External T.I. 9731985 - RETIRING ALLOWANCE - FORMER EMPLOYER

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:

Can a corporation pay a retiring allowance to a related shareholder for services provided to a former related corporation, and to another related shareholder that was an officer but not active in the daily operations and was never remunerated.

Position:

A) Yes;

B) Employment is a question of fact.

Reasons: IT-337R2

9731985
XXXXXXXXXX Fouad Daaboul

Attention: XXXXXXXXXX

January 14, 1998

Dear Sirs:

Re: Retiring Allowance

This is in reply to your letter of December 3, 1997, in which you ask whether a corporation can pay a retiring allowance to one of its related shareholders that was employed by a former related corporation, and to another related shareholder who was not active in the daily operations and was never remunerated.

Written confirmation of the tax implications inherent in particular proposed transactions are given by this Directorate only where the transactions are outlined in an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. Questions concerning actual fact situations should otherwise be directed to your tax services office. Although we cannot provide a specific answer to your query, we offer the following general comments which are not binding on the Department.

Paragraph 2 of Interpretation Bulletin IT-337R2 (enclosed) reads as follows:

"Retiring allowance" is defined in subsection 248(1) to mean an amount (other than a superannuation or pension benefit, and, after November 12, 1981, an amount received as a consequence of the death of an employee) received upon or after retirement from an office or employment in recognition of one's long service or in respect of a loss of office or employment.

In our opinion, if an amount is received by the employee after his retirement from employment in recognition of his long service or in respect of a loss of employment, such an amount will be considered a retiring allowance.

To have a deduction under subsection 60(j.1) of the Income Tax Act ("Act"), the retiring allowance amount must be paid by an employer. The amount of the deduction is based on the number of years of employment with the payer and any person related to the payer that was also an employer of the recipient. The employers should be related either at the time of payment of the retiring allowance or the time when the first employment was terminated.

Under subsection 248(1) of the Act, the term ""employee" includes officer" and the term ""employer", in relation to an officer, means the person from whom the officer receives the officer's remuneration". It is a question of fact whether an employee/employer relationship exists in a non-arm's length situation where no remuneration is involved.

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