1999 Ruling 9923323 - RETIRING ALLOWANCE - THIRD PARTY PURCHASER

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: Whether severance amounts paid to employees hired by third party purchasers are retiring allowances.

Position: Yes

Reasons: Question of fact. The pertinent facts which are all able to be established at the time of the ruling lead to the conclusion that the third party purchasers are not affiliated with former employer.

XXXXXXXXXX 992332

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling - Retiring Allowance

This is in reply to your letter of XXXXXXXXXX in which you ask for an advance income tax ruling on the payment of severance amounts to certain employees. We also acknowledge information provided during various telephone conversations (XXXXXXXXXX), and subsequent letters and faxes.

DEFINITIONS

In this ruling, 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) "Regulations" means the Income Tax Regulations.

(c) "Employer" means:

XXXXXXXXXX.

(e) "Property Sale" means:

The sale of all or substantially all of XXXXXXXXXX.

(f) "Employees" means:

The full-time or part-time employees of the "XXXXXXXXXX" who are employed in XXXXXXXXXX and in various XXXXXXXXXX locations, but excluding those who are employed on a casual or hourly basis (individually "Employee" as the context requires).

(g) "Purchaser" means:

XXXXXXXXXX (collectively "Purchasers").

(h) "Severance Amount" means:

Any portion of the amount equal to: XXXXXXXXXX% of the Employee's annual salary plus an amount that is dependent upon the Employer's severance policy, which considers years of service with the Employer or predecessor companies, as well as the Employee's age and grade level.

Our understanding of the facts and the proposed transactions is as follows:

FACTS

1. The Employer is a company XXXXXXXXXX under the laws of the province of XXXXXXXXXX. All of the issued and outstanding common shares of the Employer are owned by XXXXXXXXXX, a corporation incorporated in XXXXXXXXXX. All of the issued and outstanding preferred shares of the Employer are owned by XXXXXXXXXX, a corporation XXXXXXXXXX under the laws of the province of XXXXXXXXXX.

2. The Employer is a private corporation, a taxable Canadian corporation, and a principal-business corporation, as those terms are defined in subsections 89(1) and 66(15) of the Act.

3. The Employer is engaged in the XXXXXXXXXX business. The Employer owns assets XXXXXXXXXX either directly or through wholly-owned subsidiaries or partnerships.

4. The Employer employs approximately XXXXXXXXXX.

5. On XXXXXXXXXX, the Employer announced the Property Sale. The properties comprise all or substantially all of the properties of the Employers' "XXXXXXXXXX", and represent approximately XXXXXXXXXX.

PROPOSED TRANSACTIONS

6. The Property Sale will take place on XXXXXXXXXX.

7. The Purchasers each deal at arm's length with the Employer for purposes of the Act.

8. The Employer will terminate the Employees upon the Property Sale, or shortly thereafter, depending on the operational requirements of the Employer related to the Property Sale.

9. It is not the intention of the Employer nor any person with which the Employer does not deal at arm's length to hire or rehire the Employees once they have been terminated by the Employer.

10. It is expected that the Purchasers will offer employment to at least a portion of the Employees at rates of compensation that are competitive relative to the market.

11. The Employer will pay a Severance Amount to each Employee upon termination as outlined above under the description "Severance Amount". Alternatively,

(i) For Employees under the age of 50, and those between the ages of 50 - 54 having less than 15 years of continuous service, the Employee will also have the option of foregoing all or part of the Severance Amount in exchange for additional lifetime retirement benefits on a deferred basis (unreduced if commenced at age 65, or discounted actuarially from age 65 to the pension start date) from the defined benefit provisions of the Employer pension plan, in accordance with section 8505 of the Regulations under an approved downsizing program.

(ii) For Employees between the ages of 50 - 54, with a minimum of 15 years of continuous service, the Employee will also have the option of foregoing all or part of the Severance Amount in exchange for additional lifetime retirement benefits on a deferred basis from the defined benefit provisions of the Employer pension plan, in accordance with section 8505 of the Regulations under an approved downsizing program. The deferred pension will be payable at the later of age 55 or when the total of their age and years of service would have equaled 75 (hereinafter referred to as "75 points). If received prior to age 60, the pension payments will be discounted by 5% per year (maximum 25% reduction).

(iii) For Employees who are 55 or older , the Employee will also have the option of foregoing all or part of the Severance Amount in exchange for additional lifetime retirement benefits on a deferred basis from the defined benefit provisions of the Employer pension plan, in accordance with section 8505 of the Regulations under an approved downsizing program. The pension will be payable at age 55 or later at the Employee's option. If the Employee has 75 points, and chooses to receive the pension prior to age 60, then it will be discounted at 5% per year from age 60. If the Employee does not have 75 points, the pension will be discounted actuarially from age 65.

12. As an alternative to receiving a Severance Amount, an Employee under the age of 55 may choose a program of salary continuance.

13. The Severance Amount (and/or other benefits as described in 11 and 12 above) will be received regardless of whether or not an Employee is offered employment by a Purchaser or accepts an offer of employment from a Purchaser.

14. The Severance Amount may be received as a lump sum, or may, at the election of the Employee before the date of termination, be scheduled in up to four installments over a period of up to 24 months.

15. An Employee having accrued but unused vacation entitlements will be paid by the Employer for cancellation of those entitlements and such payments will be reported as employment income to the Employee for the year received.

PURPOSE OF THE PROPOSED TRANSACTIONS

16. The purpose of the Property Sale is to divest the Employer of certain assets and to allow the Employer to focus on its XXXXXXXXXX businesses. With the sale of these properties, the Employer will not require the services of the majority of the Employees and wishes to pay the Severance Amounts and/or other benefits in accordance with its legal obligations and as compensation for the Employees' loss of employment.

OTHER INFORMATION

17. To the best of your knowledge, none of the issues involved in this ruling request are:

a) in an earlier return of the Employer or a related person,

b) being considered by any tax services office or tax centre in connection with a previously filed tax return of the employer or a related person,

c) the subject matter of any notice of objection filed pursuant to the Act by the Employer or a related person,

d) before the courts, or

e) the subject of a ruling previously issued by this Directorate.

RULINGS GIVEN

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

A. A Severance Amount received in a taxation year by an Employee will be a "retiring allowance" as defined in subsection 248(1) of the Act and will be included in the income of the Employee in the year received pursuant to subparagraph 56(1)(a)(ii) of the Act.

B. A Severance Amount received by an Employee will, to the extent permitted therein, be deductible by the Employee under paragraph 60(j.1) of the Act.

These 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 Taxation, and are binding provided the Employees are terminated on or before XXXXXXXXXX.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate