7 April 1999 External T.I. 9904065 - SEVERANCE PAYMENT FROM A US EMPLOYER

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: Will severance payment received by a Canadian resident from a US employer be taxable in Canada, and if so will the amount be eligible to a rollover under 60(j.1)?

Position: Subject to conditions, yes.

Reasons: Question of fact.

XXXXXXXXXX 					5-990406
						Fouad Daaboul
Attention:  XXXXXXXXXX 

April 7, 1999

Dear Sirs:

Re: Severance Payment from a US Employer and Rollover to an RRSP

We are writing in response to your letter of February 17, 1999, wherein you asked whether a severance payment attributable to employment in the US received by a Canadian resident is taxable in Canada, and if so, would such a payment qualify for a rollover to a registered retirement savings plan ("RRSP") under paragraph 60(j.1) of the Income Tax Act (the "Act").

As indicated in Information Circular 70-6R3, confirmation of the tax consequences flowing from completed transactions must be obtained from your local tax services office. This Directorate will provide a technical interpretation concerning the provisions of 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.

Our comments

Under the Act, Canadian residents are subject to income tax in Canada on their world-wide income, including severance payments received from a U.S. employer. Although the nature of any payment must be determined for purposes of the application of the relevant provisions in the Act, a severance payment related to employment might be taxable as employment income or other income. It is always a question of fact whether a payment is considered to be a "retiring allowance" as this term is defined in subsection 248(1) of the Act. Paragraph 5 of Interpretation Bulletin IT-337R3 states that in order for a severance payment to qualify as a retiring allowance, the payment must be in recognition of long service or in respect of loss of an office or employment.

Where an amount is received by a taxpayer in a year as retiring allowance, the amount is required to be included in computing the income of the taxpayer in the year pursuant to subparagraph 56(1)(a)(ii) of the Act. Where an amount is received by a taxpayer in a year as a retiring allowance and the amount is included in the taxpayer's income for the year, the amount, subject to limits, is eligible to be transferred to an RRSP under which the taxpayer is the annuitant and a deduction is provided under paragraph 60(j.1) of the Act. The fact that the service was performed outside of Canada is not relevant in undertaking this calculation. We have enclosed Interpretation Bulletin IT-337R3 - "Retiring Allowances" to provide you with additional information on retiring allowances and how the rollover to an RRSP is computed.

We wish to note that the provisions of any bilateral tax convention may be applicable since, generally, the provisions of a tax convention override those of the Act. However, we cannot provide you with a more complete answer since we do not have all facts related to your question.

Where income tax has been paid to a foreign country in respect of an amount that is also included in the income of a taxpayer resident in Canada, the taxpayer may be able to claim a foreign tax credit in accordance with the Act. If the non-business income, as this term is defined in subsection 126(7) of the Act, is the only income from a foreign country, the foreign tax credit will generally be equal to the lesser of the tax paid to the foreign country and the tax otherwise payable under Part I of the Act on that income.

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