31 March 1998 External T.I. 9807305 - RETIRING ALLOWANCE - UNUSED SICK LEAVE

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 employees transferred from XXXXXXXXXX were paid employment benefits or a retirement allowance.

Position:

The payment of unused sick leave credits is not a retirement allowance but constitutes employment benefits.

Reasons:

No loss of employment or no retirement resulted from the transfer of employees from one school board to the other when the new school board is formed by the amalgamation of two previous school boards.

			5-980730
XXXXXXXXXX 		P.-A. Sarrazin

March 31, 1998

Dear XXXXXXXXXX:

Re: Unused sick leave credits paid out upon transfer

This is in reply to your letter of March 20, 1998, addressed to Karen Power of this Directorate.

In your letter, you mention that the former employees of XXXXXXXXXX have been transferred to the newly formed XXXXXXXXXX. You further mention that an agreement was reached with certain of these employees to pay out one half of their unused sick leave credits up to a maximum of 50% of the employee's annual salary. In return, these employees have forfeited any increase in the gratuity related to future wage increases or increased years of service and saw their sick leave bank reduced in accordance with the pay out.

Your Payroll Supervisor has contacted the Employer Services Branch in late 1997 and confirmed that the above transaction could be reported on a T4A as a retirement allowance. It has since come to your attention that these payments may be viewed by the Department as regular remuneration which should have been reported on a T4 and which should also have been subject to EI and CPP deductions. You ask for our comments on the nature of these payments for the purposes of the Income Tax Act (the "Act").

Our Comments

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.

A payment in recognition of long service or in respect of loss of an office or employment relating to unused sick leave credits qualifies as a retiring allowance for the purposes of the Act when the payment is made on termination of employment. This position is expressed in paragraph 5 of Interpretation Bulletin IT-337R3 (copy attached).

To be a retiring allowance, the payment must be received upon or after retirement or be paid in respect of a loss of office or employment. The Department has stated in subparagraph 3(b) of IT-337R3 that retirement or loss of office does not include termination of employment with an employer followed shortly by employment with an affiliate of the former employer. In the case of corporate amalgamations, the courts have generally ruled that an amalgamation is a continuation of the two predecessor corporations and, as a consequence thereof, we have taken the position that the amalgamated corporation would be an affiliate of each of the predecessor corporations.

Therefore, where an employee of the predecessor corporation is employed by the amalgamated corporation, no payment made by the predecessor corporation to the particular employee will qualify as a retiring allowance.

We have reviewed XXXXXXXXXX, which you have provided with your request. Paragraph 2 of that subsection states that a person's employment shall be deemed not to have been terminated for any purpose by anything done under this Part. Furthermore, paragraph 1 of the same subsection provides for a transfer to the new district school board of all the current school boards' employees who would normally have retained their employment with the old school boards had they not been transferred.

		                             XXXXXXXXXX 

It would appear that the amalgamation is, in fact, a continuation of the existing school boards as one new school board. The terms used in XXXXXXXXXX and in the information note do not provide any justification for treating this amalgamation differently from a corporate amalgamation. Consequently, we are of the view that XXXXXXXXXX would be an "affiliate" of XXXXXXXXXX and the members of the latter have not suffered a loss of office or employment. Therefore, the payment at this time of the accumulated sick leave benefits would not qualify as a retiring allowance for purposes of the Act. They should be reported as employment income on a T4 return, subject to EI and CPP deductions.

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

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