12 August 1998 External T.I. 9810585 - TREATMENT OF SEVERANCE PAYMENTS

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:

Are certain specific payments retiring allowances or tax free receipt?

Position:

Comments provided but, in general, payments of this nature are retiring allowance.

Reasons:

This is a specific proposed transaction and should be the subject of an advance income tax ruling.

XXXXXXXXXX  		981058
W. C. Harding
Attention:  XXXXXXXXXX 

August 12, 1998

Dear Sirs:

Re: Retiring Allowance Payments

This is in reply to your letter of April 22, 1998, and our telephone conversation of August 10, 1998, (XXXXXXXXXX/Harding).

As discussed during our conversation, you wish to know if certain payments to be made by a former employer will be taxable income to a former employee such that income tax deductions may be required on their payment.

In the situation at hand, a former employee established a business and purchased equipment and supplies to be used in its operation. The former employer may reimburse the former employee for the cost of the equipment and supplies.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate when the transactions are outlined in an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. Accordingly, since your letter deals with an actual proposal to pay an amount we can not provide any specific answers at this time. However, we can provide the following general comments which are not binding on the Department but may be of some assistance.

Retiring allowances are discussed in the Departments Interpretation Bulletin IT-337R3 Retiring Allowances (enclosed) and include any amount received:

(a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer’s long service, or

(b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of damages or pursuant to an order or judgment of a competent tribunal.

The payment of damages and out of court settlements in respect of general damages is discussed in paragraph 9 of the Bulletin. The paragraph clarifies that a payment of general or specific damages will normally be treated as the payment of a retiring allowance unless it is a payment of general damages (or an out of court settlements in respect of general damages) and the loss of employment involves a human rights violation. If this is the case the amount may be paid tax free as discussed in the Bulletin.

It is our opinion that an amount paid as a reimbursement of costs incurred by a former employee is a retiring allowance unless it can be established that it is paid as a result of an out of court settlement of general damages and the termination involves a human rights violation. However, we must also note that where an employee is reinstated as a consequence of a human rights tribunal decision and subsequently terminates employment, any amount paid as a consequence of the termination would be a retiring allowance and not a tax free payment in consequence of the human rights tribunal judgment.

We trust these comments will be of assistance to you.

Yours truly,

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