31 December 1998 External T.I. E9833965 - 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: Unpaid leave of absence until pension commences - has the individual retired?

Position: Question of fact, but if no pension benefits accruing and other tests described in IT-337R3 are met, generally the individual would be considered retired.

Reasons:			Consistent with positions in IT-337R3.

XXXXXXXXXX 									983396

Attention: XXXXXXXXXX

December 31, 1998

Dear Sirs:

Re: Retiring allowance, loss of employment and leave of absence to maintain eligibility for benefits to be provided at retirement

This is in reply to your facsimile transmission of December 21, 1998, and various other correspondence received relating to a particular factual situation involving a proposed payment of an amount that the recipient desires to be characterized as a retiring allowance.

Comments

As discussed, the 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 which we trust will be of assistance

"Retiring allowance" is defined in subsection 248(1) of the Income Tax Act (the "Act") to mean "an amount ... received (a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or (b) in respect of a loss of an office or employment of a taxpayer ...".

Whether an individual has retired or not is a question of fact. Generally, some of the more relevant factors in making such an assessment is the individual's continued participation in a benefit plan or a pension plan, continued salary payments, a commitment to re-employ the individual or an agreement to actually retire at a future date.

In a scenario where an individual has lost an office or employment and there is no explicit or implicit arrangement to hold a position or otherwise rehire that person, subject to the comments in the previous paragraph, the individual would generally considered to have lost that office or employment. In addition, as stated in paragraph 4 of Interpretation Bulletin IT-337R3, Retiring Allowances, "continued participation in a former employer's health plan ... for a restricted period of time would not, in itself, indicate that employment has not terminated, particularly if the employer's plan specifically permits former employees to be covered under the plan". Where an employee is receiving benefits (such as dental and medical coverage) from a former employer during a period in which the former employee has deferred commencement of the pension from the employer (in order to reduce the pension penalty because of the individual's age) and those benefits are essentially equivalent to what the individual will receive as a pensioner, we would generally not consider that individual to be an employee solely on the basis of those continuing benefits. However, if pension benefits were to continue to accrue for the period of time up to which pension benefits commence, that fact would indicate that an employment relationship continues to exist. Where pension benefits are not increasing in value (for example, under a defined benefit plan, the years of service do not increase during that time period) we would generally not consider that pension benefits continue to accrue during that period. In a situation where an employee defers receipt of a pension to a future date to reduce the pension penalty because of age, it is our view that the total value of the pension theoretically (or at least from an actuarial perspective) remains unchanged.

We trust the above comments will be of assistance to you.

Yours truly,

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