9 November 1999 External T.I. 9912655 - CONFIDENTIALITY COVENANT

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: Is tax required to be withheld on a payment made to an employee upon dismissal to secure a confidentiality agreement.

Position: Yes.

Reasons: The payment fits into the description of an amount under 6(3)(e) as an amount paid as consideration for a covenant with reference to what the employee is not to do after termination of employment, making the payment deemed to be salary, wages or other remuneration under section 5. Paragraph 153(1)(a) applies to the payment.

XXXXXXXXXX 5-991265
D. Shugar
November 9, 1999

Dear XXXXXXXXXX:

Re: Withholding Taxes on Confidentiality Agreement

We are responding to your correspondence of May 11, 1999, requesting our opinion concerning a payment of $XXXXXXXXXX to you, by your former employer, as part of a settlement agreement reached between yourself and your former employer, to secure a confidentiality agreement regarding the details of the settlement. You provided us with a copy of the settlement agreement for our review.

Our Comments

As you may be aware, on November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature.

Subsection 6(3) of the Income Tax Act (the "Act") states:

An amount received by one person from another

(a) during a period while the payee was an officer of, or in the employment of, the payer, or

(b) on account, in lieu of payment or in satisfaction of an obligation arising out of an agreement made by the payer with the payee immediately prior to, during or immediately after a period that the payee was an officer of, or in the employment of, the payer, shall be deemed, for the purposes of section 5, to be remuneration for the payee's services rendered as an officer or during the period of employment, unless it is established that, irrespective of when the agreement, if any, under which the amount was received was made or the form or legal effect thereof, it cannot reasonably be regarded as having been received,

(c) as consideration or partial consideration for accepting the office or entering into the contract of employment,

(d) as remuneration or partial remuneration for services as an officer or under the contract of employment, or

(e) in consideration or partial consideration for a covenant with reference to what the officer or employee is, or is not, to do before or after the termination of the employment.

In the absence of any evidence to the contrary, it appears that the $XXXXXXXXXX paid for the confidentiality provision fits squarely within the scope of paragraph 6(3)(e) of the Act, as an amount that can reasonably be regarded as being in consideration for a covenant with reference to what the officer or employee, is or is not, to do before or after the termination of the employment. Therefore, in our view, the payment of $XXXXXXXXXX to secure the confidentiality agreement is deemed by subsection 6(3) of the Act to be remuneration for purposes of subsection 5(1) of the Act and is required to be included in income. Subsection 153(1) of Act requires an employer to withhold income tax from the amount of salary, wages or other remuneration, paid to an employee or former employee in accordance with the rules set out in the Income Tax Regulations.

We have not reviewed, and therefore cannot comment on, other aspects of the settlement agreement.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

- 2 -