1999 Ruling 9910423 - INCENTIVE PLAN, RETIRING ALLOWANCE

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) Can payments under an employee incentive plan related to past performance be considered a retiring allowance? (2) Are payments made to an RCA trust taxed currently?

Position: (1) No; (2) No.

Reasons: (1) The amount is not in respect of the loss of office or in recognition of long service - Albino 94 DTC 6071 is not applicable; (2) No - the SDA provisions do not apply in this case. The RCA provisions will apply. Not inconsistent with ¶ 8 of IT-337R3 and Crighton 91 DTC

511.

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xxxxxxxxxx 991042
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XXXXxXxXXX, 1999

Dear Sir/Madam:

Re: Advance Income Tax Ruling - XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, as amended XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

Our understanding of the facts and proposed transactions is as follows:

Relevant Facts

1. XXXXXXXXXX (the "Taxpayer") is the XXXXXXXXXX (the "Employer"). The Taxpayer resides at XXXXXXXXXX.

The Taxpayer files his tax returns with the XXXXXXXXXX Taxation Centre and resides within the area served by the XXXXXXXXXX Tax Services Office.

2. On or about XXXXXXXXXX. the Taxpayer entered into an employment agreement (the "Employment Agreement") with the Employer. The more relevant terms of the Employment Agreement for the purpose of this ruling include:

(a) The Employment Agreement expires on XXXXXXXXXX, if the Taxpayer notifies the Employer by XXXXXXXXXX, of his intention to retire on XXXXXXXXXX.

(b) The Taxpayer is to be provided with an annual base salary which will be reviewed annually.

(c) The Taxpayer is entitled to participate in the Employer's incentive compensation plans, including the Executive Management Incentive Plan (the "Plan"), in force and offered to the Employer's senior executives.

(d) On termination of the Employment Agreement, the Taxpayer is entitled to receive an amount equal to XXXXXXXXXX months of the Taxpayer's base salary at that time.

3. On XXXXXXXXXX, the Taxpayer advised the Employer of his intention to retire on XXXXXXXXXX. By mutual agreement in writing in a letter dated XXXXXXXXXX, the retirement date was changed to XXXXXXXXXX, at which time the Taxpayer would retire and resign from his position as XXXXXXXXXX of the Employer.

4. Under the long-term incentive component of the Plan, the Taxpayer was entitled to earn bonuses based on the Employer's sustained profitability and growth in revenues over each XXXXXXXXXX period commencing in XXXXXXXXXX. The bonuses would vest in accordance with the Plan. The XXXXXXXXXX award was ~XXXXXXXXX which vested in XXXXXXXXXX. The XXXXXXXXXX award was $XXXXXXXXXX and it would vest in XXXXXXXXXX. The XXXXXXXXXX award is estimated to be $XXXXXXXXXX and it would vest in XXXXXXXXXX. The Employer wound-up the Plan on XXXXXXXXXX. The Taxpayer and the Employer are currently negotiating the value of the XXXXXXXXXX award. Even though nothing may be offered by the Employer, the Taxpayer hopes to receive $XXXXXXXXXX in consideration for his loss of the XXXXXXXXXX award as a result of the winding-up of the Plan.

5. The Employment Agreement described in paragraph 2 above was amended on XXXXXXXXXX to provide for the following:

(a) The amount to. be paid on retirement will be based on XXXXXXXXXXmonths base salary (base salary currently $xxxxxxxxxX annually) plus XXXXXXXXXX months (XXXXXXXXXX) of additional compensation that would be earned under the Plan if it would have been continued. The amount is to be paid as follows:

(i) The Employer is to pay to the Taxpayer's RRSP the amount equal to the amount that the Taxpayer is entitled to deduct under paragraph 60(j.1) of the Income Tax Act (the "Act").

(ii) The remaining amount will be paid to a trust (described in paragraph 8 below) to provide periodic payments to the Taxpayer after his retirement.

(b) The Taxpayer will be paid his vested entitlements under the Plan on his retirement. This payment will be $XXXXXXXXXX.

(c) The Taxpayer will be paid his prorated annual bonus for XXXXXXXXXX on or about XXXXXXXXXX.

6. The Taxpayer was paid the $XXXXXXXXXX as described in paragraph 5(b) above in XXXXXXXXXX. This amount will be included in the Taxpayer's employment income for XXXXXXXXXX.

7. The Taxpayer's compensation from employment for the last four years has been as follows:

XXXXXXXXXX.

Proposed Transactions

8. The Employer will establish a trust (the "Trust") for the benefit of the Taxpayer. The Taxpayer's wife will be the trustee of the Trust. The relevant terms of the Trust are as follows:

(a) The Trust will be established to provide benefits to the Taxpayer in connection with the taxpayer's retirement from his employment with the Employer.

(b) The trust will make payments to the Taxpayer in accordance with the schedule set out in section XXXXXXXXXX of the Trust agreement. The amounts held within the Trust will be paid out over a XXXXXXXXXX period commencing on the "Commencement Date" as defined in the Trust agreement. The Commencement Date shall not, in any event, be a date occurring more than XXXXXXXXX after the Taxpayer has attained 65 years of age and has ceased full time employment with the Employer.

9. The Employer will make the following payments:

(a) a payment to the Taxpayer's registered retirement savings plan equal to the amount described in paragraph 5(a)(i) above (net of any applicable withholding taxes)

(b) a payment to the Trust equal to XXXXXXXXXX% of the amount described in paragraph 5(a)(ii);

(c) a payment to the Receiver General on behalf of the Trust equal to the payment to the Trust; and

(d) a payment to the Taxpayer in respect of the XXXXXXXXXX bonus entitlements, as described in paragraph 5(c) above.

10. The Trust will make payments to the Taxpayer in accordance with the terms of the Trust agreement.

Purpose of the Proposed Transactions

11. The purpose of the proposed transactions is to establish a retirement compensation arrangement to provide retirement income to the Taxpayer.

Additional Information

12. To the best of your knowledge and the knowledge of the Taxpayer, none of the issues involved in this request for an advance income tax ruling:

(a) is in an earlier return of the Taxpayer or of a person related to the Taxpayer;

(b) is being considered by a tax services office or taxation centre in connection with a previously filed return of the Taxpayer or of a person related to the Taxpayer;

(c) is under objection by the Taxpayer or by a person related to the Taxpayer;

(d) is before the courts; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed as described above, we rule as follows:

A. The Trust described in paragraph 8 above will constitute a retirement compensation arrangement, within the meaning assigned by subsection 248(1) of the Act.

B. The amounts to be included in the Taxpayer's income in any year will consist of the following amounts:

(a) under subparagraph 56(1)(a)(ii) of the Act, the amount paid directly to the Taxpayer's RRSP by the Employer in the year (and including any applicable withholdings thereon), as described in paragraph 9(a) above.

(b) under paragraph 56(1)(x) of the Act, the amounts received by the Taxpayer in the year out of the Trust, as described in paragraph 10 above; and

(c) under subsection 5(1) of the Act, the amounts received from the employer in respect of the prorated annual bonus as described in paragraph 9(e) above.

The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the Trust is established within six months of the date of this letter.

In addition, this letter does not express or imply and should not be construed as expressing or implying any ruling other than those specifically provided above.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate