5 May 2011 Internal T.I. 2011-0399461I7 - Taxable Income of Secularized Nun

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.

Principal Issues: Whether the amount received by the taxpayer should be categorized as income from employment, a taxable retiring allowance, or as a non-taxable gift.

Position: Question of fact, but in this case, the amount is a non-taxable gift.

Reasons: The payment does not have the character of remuneration for services and there was no obligation that such a payment be made. The payment was a gift, given freely with no consideration, to help the taxpayer who was XXXXXXXXXX .

								May 5, 2011

	XXXXXXXXXX 						Tom Posadovsky, CMA
								IT Rulings Directorate
								Ontario Corporate Tax
								  Division
								(613) 952-8283

	Attention: XXXXXXXXXX 				2011-039946

Taxable Income of Secularized Nun

I am writing in response to your query concerning whether an amount received by a taxpayer is considered taxable income under the Income Tax Act. Unless otherwise specified, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the "Act") as amended.

Facts

According to your email of February 11, 2011 and our subsequent correspondence with XXXXXXXXXX from your office, our understanding of the facts is as follows:

• The taxpayer was a member of the XXXXXXXXXX (the "Order") and filed her T1 Income Tax and Benefit Returns for each year she was in the Order.
• As she was a member of a religious order and had taken a vow of perpetual poverty, the taxpayer deducted all earned income and pension benefits (if any) given to the Order pursuant to subsection 110(2) of the Act.
• The taxpayer was secularized from and released from her vows in XXXXXXXXXX of 2010, at which time the taxpayer received $XXXXXXXXXX (the "Payment") from the Order.
• The taxpayer did not request or expect any payment to be made to her.
• The Order provided you with a letter dated March 14, 2011, the purpose of which was to support why the Payment was given to the taxpayer:
  • Cannon Law dictates that those who have left legitimately from a Religious Order or Institution, or have been legitimately dismissed from one, can request nothing from the Order for any work done in it.
  • The Order's intention was that the Payment was to be a "donation" or "charitable gift" to help the taxpayer financially.
• Sister XXXXXXXXXX , the Order's treasurer in XXXXXXXXXX , subsequently clarified that the Order was not obliged and normally does not give money to those that leave their community; however, because the taxpayer is XXXXXXXXXX years of age, and not able to work, they felt it would be charitable to give the taxpayer some money to help her start out on her own. The amount of the Payment was not based on years of service or any other established criteria.

Issue

You wish to know whether the $XXXXXXXXXX received by the taxpayer is taxable pursuant to the provisions of the Act. In this respect, would the Payment be categorized as remuneration taxable under section 5 or 6 of the Act, a taxable retiring allowance, or as a non-taxable gift?

Our Comments

It is a question of fact as to whether an employment relationship exists between a religious order and its members; however, it is our view that generally, a member of a religious order is an employee. Accordingly, the value of all board, lodging and other incidentals are included in a member's income from an office or employment by virtue of paragraph 6(1)(a) of the Act while an allowance for personal or living expenses are included in income by virtue of paragraph 6(1)(b).

Subsection 110(2) of the Act permits an individual who is a member of a religious order and has taken a vow of perpetual poverty to deduct certain amounts paid by him or her to the order in computing taxable income for a taxation year. This includes the aggregate of superannuation or pension benefits and earned income for the year (as defined by section 63 of the Act) provided the requirements of subsection 110(2) are met. It is our position that a deduction under subsection 110(2) of the Act will be allowed for both the employment income paid to the order plus the taxable benefits or allowance received.

Paragraph 4 of Interpretation Bulletin IT-334R2, Miscellaneous Receipts, states that an amount received from an employer would generally be included into income pursuant to 5(1) or paragraph 6(1)(a) of the Act, even if it was voluntarily paid or given as a gift. Assuming an employment relationship, one could conclude that the taxpayer in this case received the $XXXXXXXXXX Payment by virtue of her employment with the Order. After all, in the absence of such a relationship, the taxpayer would not have received the Payment.

Given that it was received at the time when the taxpayer's employment with the Order ceased, the Payment could be viewed as a taxable retiring allowance. Paragraphs 5 and 6 of IT-337R4, Retiring Allowances, explain that where a payment is regarded as compensation for loss of an office, it will be considered to be a retiring allowance instead of employment income.

A "retiring allowance" is defined in subsection 248(1) of the Act to include, among other things, an amount received by a taxpayer in respect of a loss of employment of a taxpayer. A loss of employment usually refers to the elimination or expiration of a particular office or employment and includes the loss of an income source of an employee who is released from employment whether unilaterally or not. A retiring allowance is considered to be "other income" under the scheme of the Act and is included in income under subparagraph 56(1)(a)(ii).

Alternately, it could be argued that the Payment constitutes a non-taxable gift given to the taxpayer in her capacity as a person rather than employment income or a retiring allowance. The term "gift" is not defined in the Act, but is generally regarded as a voluntary transfer of property without consideration. For there to be a gift, there must be a donor who freely disposes of property and a donee who receives it. The donor cannot receive any right, privilege, or material benefit as a result of the disposition.

There is substantial case law that supports this view. In Phaneuf Estate v MNR [78 DTC 6001] (FCTD), a Company's founder and principal shareholder bequest the right to Mr. Phaneuf and other Company employees to acquire a number of Company shares at par value. The court found that the benefit was conferred on Mr. Phaneuf as a person and not as an employee, and as a personal gift rather than as remuneration, and hence not a taxable benefit. Justice Thurlow remarked that for a payment to be received in the capacity of employee it must "partake of the character of remuneration for services".

The same rationale was used in Au v The Queen [2005 TCC 303] (upheld by the FCA), where the Minister argued that a payment received as a result of a mitigated settlement with Mr. Au's former employer was employment income. The Appellant's position was that the amount, representing a loss in the interest of his former employer's estate, was not subject to tax because it was not employment income, there being no employer-employee relationship, and it was not business income because he was not carrying on a business. The court concluded that the amount received was not paid to replace a source of employment income, but rather a payment of a bequest from an estate, and should not be included in the taxpayer's taxable income.

In The Queen v Phillips [94 DTC 6177], the FCA found that a $10,000 relocation payment with no restrictions on its use was received by Mr. Phillips in his capacity as an employee. The court explained that the question of whether a payment is a gift, loan or the result of considerations extraneous to the employment relationship is often approached with reference to the employer's intention or the purpose of the payment.

In the case of The Queen v Blanchard [95 DTC 5479], the FCA found that a payment arising from the satisfaction of an obligation that arose under an agreement was received as "consideration or partial consideration" for entering into the contract of employment. The court explained that the terms salary, wages and other remuneration used in subsection 5(1) presume compensation for a service rendered. Therefore, in order for an amount to be included in income under that subsection, the amount must have the character of compensation for services rendered or work performed.

Conclusion

Based on the information provided, it is our view that the Payment to the taxpayer in this fact situation is not remuneration taxable under section 5 or 6 of the Act or a taxable retiring allowance for the following reasons:

• Although the Payment occurred at the time when employment with the Order ceased, it was not intended to be compensation because of the loss of employment.
• The Payment was not based on years of service with the Order, and the Order was not obligated to make such Payment.
• The taxpayer did not have a right to the Payment and there was no expectation that such funds would be received.
• Cannon Law states that those who have left legitimately from a Religious Order or Institution, or have been legitimately dismissed from one, can request nothing from the Order for any work done in it.
• The Order, by way of its letter dated March 14, 2011, indicated that the Payment was a gift, given voluntarily and freely with no consideration, to help the taxpayer who was aged and ill.
• The Federal Court of Appeal has determined, such as in Au and Phaneuff, that an employer may give a gift to someone in his or her capacity as a person rather than as an employee.

Accordingly, because the Payment did not have the character of remuneration for services rendered and there was no obligation or requirement under contract, either explicit or implicit, that such a payment be made, the Payment is a non-taxable gift and should not be included into the taxpayer's income.

We trust that our comments will be of assistance to you.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Mrs. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.

Yours truly,

Guy Goulet CA, M.Fisc.
Manager
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch