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:
Whether a “right of first refusal” after an employee is terminated would disqualify a payment from being considered a retiring allowance.
Position:
The “right of first refusal” will generally not, in and of itself, disqualify payments which would otherwise qualify as a retiring allowance from being considered as such.
Reasons:
Continued participation in a former employer’s health plan for a restricted period of time would not, in itself, indicate that employment has not been terminated; it is only when benefits such as those which only accrue to employees are paid that an employment relationship will be considered as still existing. A “right of first refusal” is not a benefit accruing to employees in this context.
Also, termination of employment will be considered as having occurred even if the “right of first refusal” is later exercised and the employee is re-hired since, at the time the termination was announced, the employee and the employer had not arranged for the re-hiring.
XXXXXXXXXX 980581
P. -A. Sarrazin
July 6, 1998
Dear Sirs:
Re: Right of first refusal - retiring allowance
This is in reply to your letter of February 26, 1998, addressed to the Edmonton Tax Services Office. Your letter was forwarded to our office for reply.
You requested our views on the effect of a “right of first refusal”, as described in the collective agreement attached to your letter, on the payment of an amount which would otherwise qualify as a retiring allowance. All or part of a retiring allowance may be transferred to an RRSP by virtue of subsection 60(j.1) of the Income Tax Act (“the Act”).
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. Where the particular transactions are completed, the enquiry (including a request to appeal a decision of the Department) should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.
A payment in recognition of long service or in respect of loss of an office or employment qualifies as a retiring allowance. This position is expressed in paragraph 5 of Interpretation Bulletin IT-337R3 (copy attached).
In paragraph 4 of the above Interpretation Bulletin, the Department has stated that continued participation in a former employer’s health plan for a restricted period of time would not, in itself, indicate that employment has not been terminated; it is only when benefits, such as those which only accrue to employees, are paid that an employment relationship will be considered to continue to exist. A “right of first refusal”, as described in the collective agreement attached to your letter, is not a benefit accruing to employees in this context. Therefore, it is our view that an amount which would otherwise qualify as a retiring allowance will not be disqualified solely due to the presence of such a “right of first refusal” in an employee’s severance agreement.
In addition, as stated in subparagraph 3(b) of the above Interpretation Bulletin, retirement or loss of office or employment does not include termination of employment with an employer, followed by re-employment with the former employer or employment with an affiliate of the former employer, when an arrangement was made prior to the termination of employment. The Department will generally not consider that the employee and the employer had arranged for the employee’s re-hiring solely because of the presence of a “right of first refusal” in the employee’s agreement.
We trust that these comments will be of assistance.
Yours truly,
Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Attachment
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