24 December 1998 External T.I. 9820115 - RETIRING ALLOWANCE - ROLLOVER TO RRSP

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:

1. Would previous years of employment be considered for purposes of 60(j.1) calculation.

2. Would an amount paid by a wound-up subsidiary (under subsection 88(1)) to an employee whose employment has continued with the parent corporation be considered a retiring allowance.

Position:

1. Yes, subject to 60(j.1)(ii)(C)

2. No.

Reasons: Wording of legislation.

XXXXXXXXXX 5-982011
Fouad Daaboul
Attention: XXXXXXXXXX

December 24, 1998

Dear Sirs:

Re: Retiring Allowance

This is in reply to your letter of July 27, 1998, wherein you requested our view on amounts paid by an employer as a retiring allowance to one of its employees qualifying for a registered retirement savings plan ("RRSP") rollover under paragraph 60(j.1) of the Income Tax Act (the "Act") in the following two situations:

The first situation involves the disposition of assets by a former employer to an unrelated new employer who hires an employee of the former employer in the same capacity that he or she occupied with the former employer. The employee has received from the former employer an amount as a retiring allowance which can be transferred to his or her RRSP by virtue of paragraph 60(j.1) of the Act. Where the new employer pays a retiring allowance following the employee's termination and the employee wants to transfer it to his or her RRSP, you asked if the previous years of employment with the former employer will be considered as a factor in determining the amount that can be transferred to such an RRSP under paragraph 60(j.1) of the Act.

The second situation deals with the winding-up of a subsidiary employer into its parent employer pursuant to subsection 88(1) of the Act and the continuation of employment of the subsidiary employer's employee with the parent employer. You asked if the employee receives a retiring allowance from the subsidiary, such an amount would it be transferable to the employee's RRSP under paragraph 60(j.1) of the Act.

As indicated in Information Circular 70-6R3, this Directorate will provide a technical interpretation concerning the provisions of the Income Tax Act (the "Act") and Regulations but not with respect to specific factual or hypothetical transactions. We may, however, provide the following general comments concerning the provisions of the Act, in accordance with the above-mentioned Information Circular, which are not binding on the Department.

Comments

At issue is the determination of "a person related to the employer" as used in paragraph 60(j.1) of the Act. It is a question of fact whether a person is related to an employer as required by subparagraph 60(j.1)(ii) of Act. Thus, it is necessary to satisfy the conditions in section 251, or subparagraph 60(j.1)(iv) or (v) of the Act, in order for the two employers to be considered "related" for purposes of paragraph 60(j.1) of the Act.

In the first situation, the former and new employers may be related by virtue of subparagraph 60(j.1)(iv) of the Act if the current employer has acquired or continued the business of the predecessor employer. Thus, where the new employer acquires or continues the business of the former employer, all the years of employment with both the current and former employer may be included for purposes of the calculation in subparagraph 60(j.1)(ii) of the Act.

With regards to your query of ascertaining the number of years that are eligible in calculating the amount that qualifies for transferring a retiring allowance to the employee's RRSP in respect of employment, when the employee has already received a retiring allowance in the past from a related employer, the following applies:

• Clause 60(j.1)(ii)(A) of the Act limits the transfer to $2,000 for each calendar year before 1996 during which an employee was employed by an employer or by a related employer and clause 60(j.1)(ii)(B) of the Act permits an additional $1500 transfer for each calendar year before 1989 the employee was not a member of a pension plan or a deferred profit sharing plan in which contributions by the employer or a person related to the employer had vested in the employee.
• Clauses 60(j.1)(ii)(C) and (C.1) of the Act then apply to limit the deduction available to the employee/retiree by reducing the aggregate amount determined under the paragraph by all amounts deducted by the paragraph that were paid by the employer or a person related to the employer before the year and in the same year, respectively.

With regard to the second situation, paragraph 3 of Interpretation Bulletin IT-337R3 dated January 30, 1998, states the following:

"Retirement or loss of an office or employment does not include:

(a) ...

(b) termination of employment with an employer followed by

• re-employment with the employer (on a full or part-time basis) or
• employment with an affiliate of the employer pursuant to an arrangement made prior to the termination of employment;...

Affiliate, for the purposes of this bulletin, includes any related or associated corporation, or any corporation that is a member of a group of corporations that do not deal at arm's length, notwithstanding that they may not be related or associated for the purposes of the Act".

In a situation where a subsidiary corporation ("Subco") is wound-up in accordance with section 88 of the Act into its parent corporation ("Parentco"), we would consider Parentco to be an affiliate of Subco for the purpose of determining whether an individual has suffered a loss of office or employment. Thus, in our view, the amount paid by Subco to the employee will not be considered to be a retiring allowance. Rather, such an amount received would be considered an employment income which is not governed by the rollover rules under paragraph 60(j.1) of the Act.

We trust our 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