14 December 1999 External T.I. 9929085 - AMALGAMATION 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: A taxpayer was employed by one company for several years, he leaves the company to go to work for another unrelated company, he is terminated from the second company immediately before the first company and second company merge. Can the years with both companies be counted for the purposes of paragraph 60(j.1) in respect of the retiring allowance subsequently paid to the taxpayer by the merged company?

Position: Question of fact.

Reasons: At the time that the retiring allowance is paid, it would have to be determined whether the two companies will be related for purposes of paragraph 60(j.1) of the Act.

XXXXXXXXXX 992908
M. P. Sarazin
December 14, 1999

Dear Madam:

Re: Related Employers and Retiring Allowance

This is in response to your letter dated November 1, 1999, wherein you requested that we provide our general comments with respect to whether two employers would be considered related for the purposes of paragraph 60(j.1) of the Income Tax Act (the "Act").

Our understanding of the facts is as follows:

1. Mr. Y was employed by Company A from 1989 to 1995. In 1995, Mr. Y left Company A and commenced employment with Company B. Company A and Company B were not related persons within the meaning assigned by subsection 251(2) of the Act.

2. While Mr. Y was employed by Company B, Company A and Company B discussed the possibility of merging their business operations.

3. In 1996, Mr. Y's employment with Company B was terminated and, on the following day, Company A and Company B announced their merger.

4. In 1999, Mr. Y received a retiring allowance from the merged Company AB.

You would like to know whether Company A and Company B would be related employers for the purposes of paragraph 60(j.1) of the Act.

Comments

It appears that the opinion you seek relates to specific proposed transactions and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996, issued by the Canada Customs and Revenue Agency (the "Agency"). 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 Agency's general views regarding retiring allowances are found in Interpretation Bulletin IT-337R3. Paragraphs 12 and 13 of IT-337R3 deal specifically with the determination of the amount that may be transferred to a registered retirement savings plan.

Subparagraph 60(j.1)(ii) of the Act provides that the amount of a retiring allowance eligible for a deduction upon a transfer to a registered retirement savings plan is calculated by reference to the number of years of employment with the current employer and with "a person related to the employer". We are of the view the employers have to be related either at the time of the termination of the previous employment or at the time at which the retiring allowance is being paid. A person related to the employer includes persons related under subsection 251(2) of the Act and persons related under subparagraphs 60(j.1)(iv) and (v) of the Act. This determination would require a review of all of the relevant facts.

Paragraph 60(j.1) of the Act, however, provides for a deduction only where the retiring allowance is paid by an employer. Thus, where someone other than the recipient's employer pays a retiring allowance, the deduction under paragraph 60(j.1) would be available only if the other person could be said to be making the payment on behalf of the employer. Whether a company amalgamated under section 87 can be said to be making the payment on behalf of one of the predecessor companies is a matter we have not considered before, although we note that there is no explicit provision for such a conclusion in section 87 of the Act. You may want to have the issue considered in the context of an advance income tax ruling.

The foregoing comments are an expression of opinion only and are not binding on the Agency, however, we trust they will be of assistance to you.

Yours truly,

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