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: Taxation of early retirement payments under the FRA program.
Position: If recipient was self-employed then the payments are taxable as business income, if the recipient was employed the payments are taxable as other income by virtue of subparagraph 56(1)(a)(vi).
Reasons: Consistent with taxation of monthly TAGS payments on which the early retirement payments are based. Findings in Westar Mining Ltd. apply to early retirement payments.
Gabriel C. de Sousa
Policy Interpretation Officer
Income Security Programs 5-982555
Human Resources Development Canada Karen Power, CA
October 20, 1998
Dear Mr. de Sousa:
Re: Fishery Restructuring and Adjustment (the “FRA”) Measures
We are writing in reply to your letter of October 1, 1998 concerning the taxation of the early retirement program available under the FRA measures. In our letter dated September 21, 1998 we indicated that, in our view, the early retirement payments, received by self-employed individuals, considered to be earning income from business, would be required to be included in the computation of business income by virtue of section 9 and/or 28 of the Income Tax Act (the “Act”). Furthermore, in our view, the early retirement payments received by individuals other than self-employed individuals, would be considered other income by virtue of subparagraph 56(1)(a)(vi) of the Act.
You are requesting further clarification and any additional rationale for this interpretation. You are concerned that the payments under the early retirement component of the FRA measures do not compare to similar programs provided under the Atlantic Groundfish Strategy (“TAGS”) and the Northern Cod Adjustment and Recovery Program (“NCARP”). It is your opinion that under TAGS and NCARP the self-employed fishers remained tied to the industry and incurred earnings related expenses while receiving their compensation, therefore the payments were considered to be earnings related. Under the FRA measures, in order for a self-employed fisher to be eligible for the early retirement incentive, he must surrender his groundfish licenses, personal fishing registration and dispose of any other licenses.
Our understanding of the early retirement program is as follows:
- It is a voluntary program to provide fishers and fishplant workers between the ages of 55-64 with regular monthly payments until they reach the age of 65.
- It will be similar to the early retirement programs offered under TAGS.
- Both current and former TAGS clients who were eligible for TAGS benefits on January 1, 1998 and who have reached the age of 55 on December 31, 1998, but are not older than 64 are eligible.
- Monthly payments will be calculated on the basis of 70% of an individual’s monthly TAGS benefit rate.
- Fishers are required to give up their groundfish licenses and personal fishing registration and dispose of any other licenses. Fishplant workers will be required to retire from the fishery.
- Individuals who are approved for early retirement cannot also apply for license retirement.
- The total amount of the Final Cash Payment will be deducted from the amount individuals receive from their early retirement payments.
As stated in our earlier letter, the early retirement payments, received by self-employed individuals, considered to be earning income from business, would be required to be included in the computation of business income. Since the early retirement payments are based on 70% of an individual’s monthly TAGS benefits, the taxation of such amounts should be consistent with the taxation of previous monthly tags payments. Under the TAGS system, monthly payments received by self-employed individuals, considered to be earning income from business, were required to be included in the computation of business income.
You are specifically concerned with how an individual can be said to be earning business income when they are no longer in the fishing business. By way of analogy, from June 1979 to May 1992 the Department was of the view that business interruption insurance benefits received by various resource industries were income not from the resource business but from the non-operation of a business. The Federal Court of Appeals overturned this position in the Westar Mining Ltd. case (92 DTC 6358). There it was stated “it is the operation of a mine as an economic activity, not the physical acts involved in extracting and processing that generates the income involved.” Thus the fishing business is the economic activity that generates income, not just the physical act of putting in and pulling out the nets. It was further stated that the insurance proceeds “were received as indemnity for the loss of income that resulted from the interruption of a processing operation...”. It was thus held that the insurance proceeds were derived from the business of operating a mine. We are of the view that the Westar Mining Ltd. findings would apply equally to the early retirement component of the FRA measures.
As noted above, an individual who chooses to receive early retirement payments cannot apply for license retirement. Under the license retirement option, individuals are specifically paid for the value of their licenses when leaving the fishing industry; as such, the proceeds from the license buy-backs are treated as the proceeds from the disposition of eligible capital property. Although giving up their fishing licenses is a condition of the early retirement payments, the fishers are choosing retirement payments which are based on their previous TAGS entitlements. Accordingly, these payments should be treated similarly to the TAGS entitlements and should not be treated in the same manner as payments under the license retirement option.
We trust our comments will be of assistance to you.
Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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