1999 Ruling 9916753 - LOSS OF OFFICE OR EMPLOYMENT

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. Are "severance payments" as the term is defined in the ruling request "retiring allowances" as defined under the Act?

2. Can these amounts be transferred to RRSPs under 60(j.1)?

Position:

1. Yes.

2. Yes.

Reasons:

The amount is paid as a result of the loss of employment with a specific employer.

The amount is paid by a related person as defined for the purposes of 60(j.1).

XXXXXXXXXX 							991675

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Proposed Retiring Allowance Payments
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, in respect of the above noted advance income tax ruling.

Definitions and Abbreviations

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;

(b) "Board" means the XXXXXXXXXX;

XXXXXXXXXX is a corporation without share capital established pursuant to the XXXXXXXXXX;

(c) "Business" means the operation of the XXXXXXXXXX;

(d) "Current Employer" means the XXXXXXXXXX

Head office located in XXXXXXXXXX
Business number XXXXXXXXXX
XXXXXXXXXX Tax Services Office
XXXXXXXXXX Tax Centre,

XXXXXXXXXX is a corporation without share capital established pursuant to the XXXXXXXXXX.

(e) "Employees" mean the employees of the Current Employer that are members of the Union (see (i) below) and who will be receiving payments (described as "Severance Payments" in your submission), pursuant to the transfer of the employees in the proposed transaction;

(f) "New Employer" means the XXXXXXXXXX

Head office located in XXXXXXXXXX
Business number XXXXXXXXXX
XXXXXXXXXX Tax Services Office
XXXXXXXXXX Tax Centre,

XXXXXXXXXX is a corporation without share capital established pursuant to the Governing Act;

(g) "Province" means the Province of XXXXXXXXXX;

(h) "RRSP" means a registered retirement savings plan; and

(i) "Union" means the XXXXXXXXXX.

Relevant Facts

1. A ruling issued by Revenue Canada on XXXXXXXXXX, 1999 has confirmed that the New Employer will be considered to be a "XXXXXXXXXX" for the purposes of the Excise Tax Act (the "ETA").

2. A ruling request dated XXXXXXXXXX is currently being considered by GST/HST Rulings and Interpretations. The ruling requests a ruling from Revenue Canada confirming that subsection 155(1) of the ETA would not apply to the transfer of the Business because the Current Employer and the New Employer will be dealing at arm's length at the time of the transfer.

3. The New Employer is subject to the general direction and control of the Board. Both the New Employer and the Board were established partly for the purpose of assuming the operation of the Business. The Governing Act provides that the New Employer will acquire substantially all of the assets and liabilities currently owned by the Current Employer (as agent for the Province) and will assume the day-to-day operations of the Business, while the Board will exercise general direction and control over the New Employer.

4. The New Employer and the Board do not act as agents for the Province in the operation of the Business.

5. The Governing Act, which came into effect on XXXXXXXXXX, provides for the transfer of assets from the Current Employer to the New Employer (the "Transfer"). Specifically Section XXXXXXXXXX of the Governing Act provides in part that:

XXXXXXXXXX.

6. The Transfer will be effective on the day section XXXXXXXXXX of the Governing Act is proclaimed into force (expected to be XXXXXXXXXX).

7. The Current Employer's XXXXXXXXXX board members from time to time are as follows:

(a) a chair, appointed by the Lieutenant Governor in Council;

(b) the chairs of the XXXXXXXXXX councils of the XXXXXXXXXX; and

(c) the mayor of the XXXXXXXXXX.

8. On the date of the Transfer, the New Employer's board members will be:

(a) the mayor of the XXXXXXXXXX;

(b) the chairs of the councils of the XXXXXXXXXX; and

(c) a chair.

9. The Board will be composed of the following members on the date of the Transfer:

(a) the chair of the council of XXXXXXXXXX municipalities of XXXXXXXXXX;

(b) the mayor of each lower-tier XXXXXXXXXX that forms part of each of the above XXXXXXXXXX (other than XXXXXXXXXX);

(c) the mayor of the XXXXXXXXXX;

(d) XXXXXXXXXX members of the council of the XXXXXXXXXX;

(e) a member of council of the XXXXXXXXXX who is also a member of the council of the XXXXXXXXXX; and

(f) a chair, elected by the above members.

10. The Current Employer has approximately XXXXXXXXXX unionized employees. Approximately XXXXXXXXXX of the unionized employees are represented by the Union. XXXXXXXXXX employees are represented by another union while the balance of the employees are not represented by a bargaining unit. This ruling only applies to the approximately XXXXXXXXXX employees represented by the Union (defined as the "Employees" in 1.(e) above).

11. The rights and obligations of the Current Employer in respect of its employees will not vest in the New Employer at the time of the Transfer, as evidenced by subsection XXXXXXXXXX of the Governing Act.

12. Notwithstanding subsection XXXXXXXXXX of the Governing Act, in accordance with subsection XXXXXXXXXX of the Governing Act, the non-unionized employees of the Current Employer will be deemed to continue their employment with the New Employer at the time of the Transfer. Accordingly they will not receive any severance pay as a result of the Transfer.

13. In contrast, the Employees' employment with the Current Employer will not be deemed by the Governing Act to continue with the New Employer at the time of the Transfer.

14. The New Employer has determined that it would be in its best interests if the Employees were to be employed by the New Employer following the Transfer. As a result, and following protracted negotiations among the New Employer, the Current Employer and the Union, the New Employer agreed to continue the bargaining relationship with the Union and to make an offer of employment to all Employees at the date of the Transfer.

15. At the date of the Transfer, the Employees' employment with the Current Employer will terminate and the Employees will commence their employment with the New Employer.

16. The Employees are entitled to severance pay pursuant to article XXXXXXXXXX of their collective agreement with the Current Employer which read:

XXXXXXXXXX.

17. To clarify, article XXXXXXXXXX which is herein referred to as the general severance pay provision, provided that one week's pay per year of service would be paid to all employees who met the eligibility requirements. On the other hand, article XXXXXXXXXX provided that two week's pay per year of service would be paid to employees who met the eligibility requirements and were placed on permanent layoff. In the latter case, the payment effectively included the amount of general severance equal to one week's pay per year of service and an additional week's pay per year of service for a total of two week's pay per year of service.

18. At the time of the Transfer, a new collective agreement between the New Employer and the Union will be put in place (the "New Agreement"). The severance payment entitlement provided in the New Agreement is set out in article XXXXXXXXXX thereof:

XXXXXXXXXX.

19. The New Agreement no longer provides a general severance pay entitlement and the permanent layoff severance pay provision has been reduced from two weeks' to one week's pay per year of service. The New Agreement now provides that the severance pay will be payable only in cases where employees are placed on permanent layoff at a rate of one week's pay per year of service.

20. As part of the negotiations with the Employees, the New Employer agreed to compensate the Employees who will become employees of the New Employer after the date of the Transfer for the loss of their employment with the Current Employer by making a severance payment to each Employee in the amount of one week's pay per year of service with the Current Employer. This effectively allowed the New Employer to negotiate the elimination of the general severance provision and any liability in respect of it on a going-forward basis.

21. The Province, on behalf of the Current Employer and the XXXXXXXXXX, has agreed to make a cash payment to the New Employer in full and final satisfaction of all liabilities related to the employment of the employees of the Current Employer (see 11 above) who will become employees of the New Employer after the date of the Transfer.

Proposed Transaction

22. Within XXXXXXXXXX days of the date of the Transfer, the New Employer will make a payment to each of the Employees in the amount of XXXXXXXXXX hours pay per year of service with the Current Employer and proportionately for part of a year of service (the "Severance Payment"). The Severance Payment will be funded out of the payment made by the Province to the New Employer, as described in paragraph 21 above.

Purposes of the Proposed Transaction

23. The purposes of the proposed transaction are:

(a.) to compensate the Employees for the loss of their office or employment with the Current Employer; and

(b.) to allow the New Employer to eliminate its liability in respect of the Employees' severance pay entitlement, as described in paragraphs 16 through 21 above.

Additional Information

24. To the best of your knowledge and that of the Current Employer and the New Employer, the issues related to this request:

(a) have not previously been reported in the Current or New Employers', or any related party's, prior income tax returns;

(b) are not being considered by a tax services office in connection with any of the Current or New Employers' or any related party's prior income tax returns;

(c) are not under objection by the Current or New Employer or by any related person;

(d) are not before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has expired; and

(e) are not the subject of a ruling previously issued by this Directorate.

Rulings

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

A The Severance Payment made by the New Employer to each Employee will qualify as a retiring allowance as defined in subsection 248(1) of the Act and will be included in the Employee's income pursuant to subparagraph 56(1)(a)(ii).

B In computing income for the year in which the Retiring Allowance is received, an Employee may deduct an amount within the limits permitted under paragraph 60(j.1), upon the contribution in the year or within 60 days after the end of the year of all or a portion of the Retiring Allowance received to an RRSP under which the Employee is the annuitant.

Additional Comments

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

The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and are binding on Revenue Canada provided the proposed transaction is implemented on or before XXXXXXXXXX.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch