10 June 1999 External T.I. 9912315 - 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 an instalment payment under a retiring allowance be allocated to a prior year?

2. Is interest paid on an amount borrowed to finance living expenses until the retiring allowance is paid deductible?

3. Is the withholding of tax on the non-eligible amount for transfer to an RRSP required where the taxpayer has an RRSP deduction limit?

Position:

1. No;
2. No;

3. Yes, unless authority is obtained from a TSO.

Reasons:

Wording of the Act

XXXXXXXXXX 5-991231
Fouad Daaboul
June 10, 1999

Dear Sir:

Re: Retiring Allowance

We are writing in response to your letter of April 26, 1999, wherein you asked us to provide our comments concerning the tax treatment surrounding an amount that you expect to receive later this year pursuant to a wrongful dismissal claim.

Where interpretations are sought on transactions that are seriously contemplated in the near future, you may consider requesting an advance income tax ruling. The process for requesting advance rulings is described in Information Circular IC-70R3 dated December 30, 1996. Notwithstanding the foregoing, we are prepared to offer the following comments which are expressions of opinion only and are not binding on the Department.

The term "retiring allowance" is defined in subsection 248(1) of the Income Tax Act (the "Act"), to mean:

"an amount ... received ... in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account of or in lieu of payment of, damages ... by the taxpayer ...".

In addition, as stated in paragraph 9 of Interpretation Bulletin IT-337R3, Retiring Allowances, an amount paid on account of or in lieu of general damages, that is, damages for loss of self-respect, humiliation, mental anguish, hurt feelings, etc., or pursuant to an order or judgement of a competent tribunal may be a retiring allowance if the payment arises from a loss of office or employment of a taxpayer.

As stated in paragraph 8 of IT-337R3, a retiring allowance may be payable by instalments and are included in income in the year received. An amount received as a retiring allowance in a particular year cannot be attributed to and taxed in a year other than the year in which it is received.

It is the Department's position that pre-judgment interest paid on an award or settlement for wrongful dismissal is not taxable. However, interest payable in respect of post-judgment interest on an award or settlement for wrongful dismissal is included in the recipient's income as interest income. Where interest has been paid in respect an amount borrowed by the taxpayer to pay personal or living expenses, the interest is not deductible as the borrowed funds have not been used for the purpose of earning income from a business or property.

As stated in paragraph 10 of IT-337R3, amounts received as an award or reimbursement of legal expenses paid by a taxpayer to collect or establish a right to a retiring allowance are required to be included in the taxpayer's income under paragraph 56(1)(l.1)of the Act. However, subparagraph 60(o.1)(b) of the Act permits a deduction, subject to certain limits, for legal expenses paid by the taxpayer to collect or establish a right to a retiring allowance.

Pursuant to paragraph 153(1)(c) of the Act, every person paying a retiring allowance to an individual is required to deduct or withhold therefrom such amount as is determined in accordance with the Income Tax Regulations (the "Regulations"). In this regard, under subsection 100(3) of the Regulations, no withholding will be required on the eligible amount, as determined by paragraph 60(j.1) of the Act, if it is transferred directly to the annuitant's RRSP. However, paragraph 100(3.2)(a) of the Regulations provides that the non-deductible portion of a retiring allowance is subject to withholding tax whether or not such an amount exceeds the individual RRSP deduction limit. If an individual wishes to have a reduction in withholding tax on the non-eligible amount, the individual is required to obtain a letter of authority from his or her appropriate tax services office. Information on how to obtain such a letter is contained in the Revenue Canada publication, Employer's Guide to Payroll Deductions.

The publications referred to in this letter may be obtained from your local tax services office and can also be located on Revenue Canada's web site (www.rc.gc.ca).

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

??