11 June 2010 External T.I. 2010-0362821E5 - Retiring Allowance and Re-employment

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 an amount is a retiring allowance, if it was received by an employee upon or after termination of employment and the employee was subsequently rehired by the former employer?

Position: Yes, if there was no arrangement or assurance that the employee would be subsequently rehired.

Reasons: Interpretation of "loss of an office or employment" in the definition of "retiring allowance" pursuant to s.248(1).

XXXXXXXXXX  							2010-036282
									Peky Tsang
									(613) 957-3494
June 11, 2010

Dear XXXXXXXXXX :

Re: Retiring Allowance

This is in response to your facsimile of April 7, 2010, wherein you requested our comments on whether a retiring allowance would be recharacterized as employment income if the recipient were later rehired by the same employer.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. For more information concerning advance tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. The following comments are, therefore of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to in this letter can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/formspubs/menu-e.html.

Whether an amount received by an employee, on or after termination of employment, is a retiring allowance and included in income pursuant to subparagraph 56(1)(a)(ii) of the Income Tax Act (the "Act") is a question of fact that can only be determined after a review of the employment contract, and all other facts relevant to the particular situation.

Retiring allowance is defined in subsection 248(1) of the Act to mean an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv) of the Act) received by a taxpayer on or after retirement of the taxpayer from an office or employment in recognition of the taxpayer's long service or in respect of a loss of an office or employment of the taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal.

Our general views regarding retiring allowances are set out in Interpretation Bulletin IT-337R4 "Retiring Allowances". Paragraph 8 states that retirement or loss of an office or employment does not include:

"...(b) termination of employment with an employer followed by re-employment with the employer (on a full or part-time basis) or employment with an affiliate of the employer pursuant to an arrangement made prior to the termination of employment."

In Income Tax Technical News No. 7, dated February 21, 1996, we made the following comment:

"We did not intend to place a temporal limit on the period after termination of the employment in which an individual could not be hired by an affiliate. Instead, the intention was to deny retiring allowance treatment of payments made by the employer where arrangements have been made for the individual to obtain employment with an affiliate. If there is no assurance or offer of a new employment with an affiliate at the time the individual ceases the employment, then we will consider a loss of employment or retirement to have occurred."

These comments continue to be valid and apply equally to the situation where it is the former employer and not an affiliate that offers the subsequent employment.

In the situation you described, an employee received a payment as a retiring allowance and the employee did not have any assurance at the time of termination of being re-employed by the former employer. In such case, it is our position that the treatment of the payment as a retiring allowance will not be adversely affected where the employee is rehired by the former employer, in the same year or at a later time when circumstances have changed.

Finally, further to our telephone conversation (Tsang/XXXXXXXXXX ) in May 2010, you also requested our comments on the treatment of the payment should it be determined that it is not a retiring allowance. In this case, it would be considered employment income includable in income pursuant to subsection 5(1) of the Act and subject to withholding tax.

We trust the above comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CA
for Director
Deferred Compensation Arrangements and Retirement Plans Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch