1999 Ruling 9926003 - RETIRING ALLOANCES AND OUTSOURCING

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 outsourcer 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 outsourcer is not affiliated (as that term is used in IT-337R3) with former employer.

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Attention: XXXXXXXXXX
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
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

(e) "Employees" means:

Those employees in support positions as described in 5 and 7 below and who will be terminated as a direct consequence of the outsourcing of those functions to the Outsourcer as described in the "proposed transactions", and most of whom are employed in XXXXXXXXXX, but excluding those who are employed on a casual or hourly basis (individually "Employee" as the context requires).

(f) "Milestone Date" means with respect to an Employee, the date at which the Employee will

(i) become XXXXXXXXXX years of age,

(ii) acquire XXXXXXXXXX years of service while the Employee is XXXXXXXXXX years of age,

(iii) acquire XXXXXXXXXX points (i.e. total of age and years of service equals XXXXXXXXXX), or

(iv) become XXXXXXXXXX years of age.

(g) "Outsourcer" means:

XXXXXXXXXX, or its affiliate.

(h) "Severance Amount" means:

Any portion of an amount received from the Employer in recognition of an employee's long service or in respect of the loss of an Employee's employment 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. Terminated employees as described in paragraph 7 below, will receive an additional amount of XXXXXXXXXX% of the employee's annual salary.

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 inXXXXXXXXXX. 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 and a taxable Canadian corporation as those terms are defined in subsection 89(1), and a XXXXXXXXXX.

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

4. The Employer employs approximately XXXXXXXXXX.

5.

XXXXXXXXXX

6. On XXXXXXXXXX, the Employer sold its XXXXXXXXXX properties to XXXXXXXXXX arm's length purchasers. The properties comprised all or substantially all of the properties of the Employer's XXXXXXXXXX. Approximately XXXXXXXXXX employees were terminated by the Employer as a result of the property sale, XXXXXXXXXX. The proposed payment of a retiring allowance with respect to this termination was the subject of an advance ruling dated XXXXXXXXXX, 1999, numbered 992332.

7. Several employees of theXXXXXXXXXX continue to be employed by the Employer to ensure a smooth transition after the property sale as described in 6.

8. On XXXXXXXXXX the Employer issued termination notices to approximately XXXXXXXXXX Employees, to be effective on or after XXXXXXXXXX, unless the Employee chooses a program of salary continuance as described in paragraph 18 and 19 below. The termination notices are subject to the execution and closing of the outsourcing agreement by the Employer and Outsourcer.

PROPOSED TRANSACTIONS

9. The Employer intends to outsource a portion of its XXXXXXXXXX support services to the Outsourcer. The outsourcing contract between the Employer and the Outsourcer will be for a defined period, which contract will be renewable.

10. The Outsourcer deals at arm's length with the Employer for purposes of the Act.

11. The Employer will terminate the Employees as part of the outsourcing arrangement. The Employees will be terminated on or after XXXXXXXXXX.

12. 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.

13. The Outsourcer, at its option, will offer employment to the majority of the terminated Employees who formerly performed the functions to be taken over by the Outsourcer. Acceptance of an offer of employment will be at the option of the terminated Employees. Those who accept the offer of employment will become employees of the Outsourcer.

14. In performing the services for the Outsourcer, the employees may occupy the same or similar premises as the premises occupied prior to the outsourcing. These premises will be subleased to the Outsourcer by the Employer until such time as the Employer's head lease with the building owner expires in XXXXXXXXXX. The premises will be under the direction and control of the Outsourcer during the term of that sub-lease.

15. The scope and amount of the services to be completed by the Outsourcer for the Employer is established by contract. Certain terms of the contract are as follows:

(i) The Outsourcer shall determine how to staff its services as provided to the Employer.

(ii) The Outsourcer and the Employer are not joint employers under the contract.

(iii) The Employees who accept employment with the Outsourcer will do so at 1) an annual base salary equal to the base salary paid to the Employee by the Employer at the time of termination, plus 2) the Outsourcer's benefits package which takes into account years of service with the Employer, except for the purposes of calculating severance policies of the Outsourcer.

(iv) The Employer and the Outsourcer agree to second staff between themselves during the term of the contract.

16. 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 XXXXXXXXXX, and those between the ages XXXXXXXXXX having less than XXXXXXXXXX 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 from the defined benefit provisions of the Employer pension plan in accordance with section 8505 of the Regulations under an approved downsizing program. The benefits may be received on a deferred basis (unreduced if commenced at age XXXXXXXXXX, or discounted actuarially from age XXXXXXXXXX to the pension start date) or as a lump-sum payout of the commuted value to be transferred to a locked-in RRSP.

(ii) For Employees between the ages of XXXXXXXXXX with a minimum of XXXXXXXXXX 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 from the defined benefit provision of the Employer pension plan in accordance with section 8505 of the Regulations under an approved downsizing program. The benefits may be received 1) on a deferred basis at the later of age XXXXXXXXXX or when the total of the Employee's age and years of service equal XXXXXXXXXX (referred to hereinafter as "XXXXXXXXXX points"), and if received prior to age XXXXXXXXXX, the pension payments will be discounted by 5% per year to a maximum 25% reduction; or 2) as a lump-sum payout of the commuted value to be transferred to a locked-in RRSP.

(iii) For Employees who are XXXXXXXXXX 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 XXXXXXXXXX or later at the Employee's option. If the Employee has XXXXXXXXXX points, and chooses to receive the pension prior to age XXXXXXXXXX, then it will be discounted at 5% per year from age XXXXXXXXXX. If the Employee does not have XXXXXXXXXX points, the pension will be discounted actuarially from age XXXXXXXXXX.

17. The Severance Amount (and/or other benefits as described in 16 above) will be received regardless of whether or not an Employee is offered employment by the Outsourcer or accepts an offer of employment from an Outsourcer

18. An Employee who does not accept employment with an Outsourcer, and who is under the age of XXXXXXXXXX may choose a program of salary continuance. Severance Amounts will be reduced by amounts paid under the salary continuance program.

19. Subject to approval by Registered Plans Division, Canada Customs and Revenue Agency, an Employee who is under the age of XXXXXXXXXX and who accepts employment with an Outsourcer may choose a program of salary continuance in order to accrue pensionable service until the next Milestone Date, if the Milestone Date is within 24 months of the effective date of the outsourcing agreement. Severance Amounts will be reduced by amounts paid under the salary continuance program. Employees who do not have a Severance Amount sufficient to fund the salary continuance are not eligible to participate in the salary continuance program. Employees who participate in this program of salary continuance will be terminated by the Employer on the Milestone Date. Such Employees will not be eligible to participate in the Outsourcer's pension plan or other retirement arrangement until after the Milestone Date.

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

21. 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

22. The Employer has determined that various types of support services are not part of its "XXXXXXXXXX" businesses, and wishes to outsource these services to the extent possible. By doing so, the Employer expects to derive benefits from reduction of costs, increased flexibility and increased focus on its XXXXXXXXXX businesses. The Employer 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

23. 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 except to the extent considered in the ruling dated XXXXXXXXXX, 1999, numbered 992332.

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, or, for Employees under a salary continuance program as outlined in paragraphs 18 and 19 above, provided the Severance Amount is received by an Employee on or before XXXXXXXXXX.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate