16 September 1999 External T.I. 9913925 - SICK LEAVE PAYMENT, 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) Where an employee retires early and is paid his or her accumulated sick leave in bi-weekly instalments before receiving his or her pension benefits, would the sick leave qualify as a retiring allowance?

2) Where an employee retires early and is paid his or her accumulated sick leave in bi-weekly instalments after the commencement of the receipt of his or her pension benefits, would the sick leave qualify as a retiring allowance?

Position: Question of fact.

Reasons: Accumulated sick leave that is paid out after retirement in recognition of long service or before or after early retirement (i.e., for loss of employment) may qualify as a retiring allowance.

Xxxxxxxxxx 991392
M. P. Sarazin

Attention: xxxxxxxxxx

September 16, 1999

Dear Sir\Madam:

Re: Accumulated sick Ieave and Retiring Allowance

This is in reply to your letter dated May 14, 1999, wherein you ask whether certain accumulated sick leave credit payments paid in instalments (the "Instalments") under an early retirement program would qualify as a retiring allowance for purposes of the Income Tax Act (the “Act”). In one situation the Instalments occur only after all employment benefits and income cease and commence at the same time pension benefits start to be paid. In the second situation the Instalments commence after employment income has ceased and while the recipient is still entitled to other employment benefits (except the accrual of pension benefits) but cease before pension benefits start to be paid.

Comments

It appears that the opinions you seek relate 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 with respect to retiring allowances are found in the enclosed Interpretation Bulletin IT337R3 titled "Retiring Allowances" (the "IT").

The treatment of payments related to unused sick leave credits and payments for accumulated vacation leave is discussed in paragraph 5 of the IT. We note that the first sentence of paragraph 5 states that "to qualify as a retiring allowance, a payment must be in recognition of long service or in respect of loss of an office or employment". Generally, the payment of unused sick leave credits will qualify as a retiring allowance where it is, in fact, paid on or after retirement in recognition of the employee's long service or in respect of a loss of employment. Paragraph 8 of the IT discusses the payment of a retiring allowance as a lump sum or in instalments - where the employee has an option to receive a retiring allowance in instalments in lieu of a lump sum and elects to receive_ instalments prior to the loss of employment, each instalment will be taxed as a retiring 'allowance amount in the year of receipt.

In determining whether an employee is retiring or losing his or her office or employment, the comments in paragraph 6 of the IT may apply since your proposed program may be part of an early retirement incentive plan being offered to employees in order to eliminate jobs or positions for economic reasons. Where an employee loses his or her office or employment, retiring allowance payments related to that loss of office or employment can be made before or after employment ceases. Thus, the fact that they may still be employed and receiving employment benefits would not cause a payment of an instalment of a retiring allowance paid for loss of employment to lose its character as such. We are not sure if this is relevant to your situation since you indicate that pension benefits start to be paid coincident with or after the Instalments are paid which implies that early retirement" may not be in issue.

If the Instalments relate to retirement and are in recognition of long service, paragraph, 4 of the IT discusses the effect that continued participation in certain benefit plans will have on the determination of whether an employee has, in fact, retired for purposes of the Act. This would be relevant to ensure the timing of the payments do not taint their character as a retiring allowance.

Thus, assuming the early retirement program is offered in order to eliminate jobs as contemplated by paragraph 6 of the IT, a payment of accumulated sick leave credits made to compensate for that loss of employment may be paid in advance of the loss of employment and, if so elected by the employee before the loss, may be paid in instalments in lieu of a lump sum.

We trust these comments will be of assistance although they are not binding on the Department in respect of your specific proposed transactions.

Yours truly,

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

ENCLOSURE