5 January 1999 External T.I. 9819345 - PAYMENTS BASED ON FUTURE PROFIT - RA?

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:

Could amounts computed by reference to the employer’s eventual profits and payable to an employee on a periodic basis, for a certain period of time after the employee’s retirement, be considered a retiring allowance?

Position: Probably not.

Reasons:

The definition of a retiring allowance refers to a payment made to a taxpayer for his long service with an employer. The quantum of payments based on an employer’s future profitability would most likely, in our view, affect the characterization of the payment.

XXXXXXXXXX 			981934
P. -A. Sarrazin
Attention: XXXXXXXXXX 

January 5, 1999

Dear XXXXXXXXXX:

Re: Payments based on future profits - whether retiring allowances

This is in reply to your letter dated July 27, 1998, wherein you requested our views as to whether a series of payments to a retired employee could qualify as a retiring allowance as this expression is defined under subsection 248(1) of the Act.

Our comments

Our comments will represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as mentioned in paragraph 22 of Information Circular 70-6R3, are not binding on the Department.

“Retiring allowance” is defined in subsection 248(1) of 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 or a benefit described in subparagraph 6(1)(a)(iv)) 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 judgement of a competent tribunal,

by the taxpayer or, after the taxpayer’s death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer.

With regard to retired employees, long service is usually considered to have reference to the total number of years in an employee’s career with a particular employer or affiliated employers. In our experience, retiring allowances are pre-determined amounts since they are a payment in recognition of prior and long service. It is difficult to appreciate how future payments to be based on future profits, if any, can be in recognition of past service.

As indicated in response to question 9 of the Prairie Tax Conference in 1992, the fact that an amount is contingent, and thus not deductible, at the time an individual retires does not necessarily mean that the amount cannot qualify as a retiring allowance. Although it is recognized, as evidenced by subsection 78(4), that the related expense can be incurred in a year prior to the year a retiring allowance is paid to an individual, the determination of whether or not the payment is a retiring allowance (or an instalment payment of an amount that is a retiring allowance) will normally be made at the time the payment is received by the individual, since the retiring allowance definition reads “an amount... received”. Where the total of the payments made to an individual is reasonable and otherwise qualifies as a retiring allowance (i.e. it is paid as a consequence of retirement or loss of office or employment), the fact that the timing of the payments is determined on the basis of the employer’s profitability would normally not of itself affect the characterization of the payments or their deductibility. However, where the quantum of payments is based on an employer’s profitability, the characterization of the payment would most likely, in our view, be affected.

We trust that our comments will be of assistance.

Yours truly,

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