6 August 1999 External T.I. 9911005 - RETIRING ALLOWANCE, RETIRE

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 a certain payment qualify as a retiring allowance?

Position: Question of fact but probably not.

Reasons: Relates to a proposed transaction and should be the subject of an advance income tax ruling. Comments will be restricted to general comments.

XXXXXXXXXX 991100
M. P. Sarazin
Attention: XXXXXXXXXX

August 6, 1999

Dear Sirs:

Re: Retiring Allowance

This is in reply to your letter dated April 13, 1999, wherein you requested our comments with respect to whether a certain payment would qualify as a retiring allowance within the meaning assigned by subsection 248(1) of the Income Tax Act (the “Act”).

Opco, a consulting services provider, is a licensee of U.S.Co. Opco employs its principal shareholder (the “Employee”). Subco, a Canadian subsidiary of U.S.Co, operates the same business as Opco in different regions of Canada. Because of the Employee’s success, Subco hires the Employee to run its operations as well. U.S.Co wants to purchase Opco and, on closing, Opco wants to pay the Employee a retiring allowance.

Comments

It appears that the opinion you seek relates to specific proposed transactions and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada. Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. However, we can provide you with the following general comments.

The Department’s general views regarding retiring allowances can be found in the enclosed Interpretation Bulletin IT-337R3. Whether an employee has retired or lost his or her employment is a question of fact. Since it is likely that Opco will continue to exist after its sale and the Employee will continue to run both Opco and Subco, the Employee will not be entitled to receive a retiring allowance because of the continued employment with Subco and Opco after the sale of Opco. We note that paragraph 3 of IT-337R3 identifies situations where the Department would not consider a person to have retired or suffered a loss of an office or employment.

Paragraph 3(a) of IT-337R3 states that an individual is not considered to have retired where he or she transfers from one office or position to another with the same employer (or an affiliate). For purposes of IT-337R3, the expression “affiliate” is defined in paragraph 3 of IT-337R3 to include 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 purposes of the Act. In the above situation, Opco, Subco and U.S.Co may not deal with each at arm’s length because of the Employee’s relationship with Opco and Subco and because of the license agreement which exists between U.S.Co and each of Opco and Subco. However, we note that this determination is a question of fact.

Paragraph 3(b) of IT-337R3 states that an individual is not considered to have retired where he or she terminates employment with an employer followed by re-employment with the employer or employment with an affiliate of the employer pursuant to an arrangement made prior to the termination. This would be the case where Opco is wound-up subsequent to its sale and it is concluded that Opco, Subco and U.S.Co were affiliates at the time that Opco was acquired by U.S.Co. Again, this determination can only be made after a review of all of the facts.

Paragraph 13 of IT-337R3 provides information regarding the computation of the number of years of employment that may be used in determining the amount that may be transferred under paragraph 60(j.1) of the Act. Paragraph 13(b) provides information regarding the extended meaning of “person related to the employer”. This is relevant where the employee has terminated employment with Opco, Subco and any other affiliates and a retiring allowance is paid. All years of employment prior to 1996 with the employer and persons related to the employer may be used to calculate the eligible amount of a retiring allowance for purposes of paragraph 60(j.1) of the Act.

We trust the above comments will be of assistance.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate

ENCLOSURE