1 June 2010 External T.I. 2009-0328501E5 - Deductibility of a 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.

Principal Issues: Whether an employer can claim a current deduction for a retiring allowance which will be paid in the future.

Position: Provided general comments.

Reasons: Depends on whether the employer has incurred the expense which is a factual determination.

XXXXXXXXXX 2009-032850
S. Bernards
June 1, 2010

Dear XXXXXXXXXX :		

Re: Deductibility of a Retiring Allowance

This is in response to your email sent on June 14, 2009 wherein you requested our views concerning the timing of the deductibility of a retiring allowance for tax purposes. Specifically, you asked whether an employer can claim a current deduction for a retiring allowance to be paid in the future. You note that the amount would be recognized by a director's resolution, communicated to the employee, recorded in the employer's books as a payable and expensed for accounting purposes.

It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are, however, prepared to provide the following general comments.

Our Comments

Generally, a "retiring allowance" is defined in subsection 248(1) of the Income Tax Act (the "Act") to mean an amount received on or after retirement of an individual in recognition of the individual's long service. The definition also includes amounts received in respect of a loss of office or employment of an individual.

The CRA's general views regarding retiring allowances are explained in Interpretation Bulletin IT-337R4, Retiring Allowances. Paragraphs 3 to 8 of IT-337R4 discuss the meaning of retirement and loss of office or employment. Paragraph 24 of IT-337R4 discusses the deductibility of a retiring allowance by the payer (usually the employer) in computing income under subsection 9(1) of the Act. In particular, it indicates that to be considered a deductible outlay, a retiring allowance must, by virtue of section 67 of the Act, be reasonable in the circumstances having regard to the length of service involved, its relationship to the remuneration received for those years of service, and the value of pension and other retirement benefits to which the retiree is entitled in respect of that service. It further states that for full-time employees, the amount eligible for rollover under paragraph 60(j.1) of the Act will be accepted as "reasonable in the circumstances".

With respect to timing of the deductibility of a retiring allowance by an employer, the courts have addressed the deductibility of expenses and the concept of profit under section 9 of the Act. Generally speaking, net income or profit is computed in accordance with well-accepted business principles, which in most cases, require some form of accrual basis of accounting. Paragraph 18(1)(a) of the Act provides that no outlay or expense is deductible in computing the income of a taxpayer from a business or property, unless it was made or incurred for the purpose of gaining or producing income. In the case of The Queen v McLarty, 2008 DTC 6354, the Supreme Court of Canada cited the words of Harlow J.A. in Wawang Forest Products Ltd. v. The Queen, 2001 DTC 5212 (FCA), that "generally a taxpayer incurs an expense when he has a legal obligation to pay a sum of money" and commented that "the expense will have been incurred if the liability is absolute and not if it is contingent".

In the situation described, it is not clear that the amount set up as a payable in the current year qualifies as a retiring allowance. A requirement is that the amount is received on or after retirement or in respect of a loss of an office or employment. There is no indication in your email that the employee has retired or ceased to be employed in the year. Further, as noted above, in order for an expense to be deductible, the employer must have incurred the expense and it is not evident that the employer has an absolute and unconditional obligation to pay the retiring allowance. These are questions of fact which must be determined by considering all of the relevant facts and documentation.

In addition, subsection 78(4) of the Act denies a current deduction for retiring allowance expenses (as well as expenses for salary, pension and other forms of remuneration) where the amount remains unpaid 180 days after the end of the taxation year in which the expense was incurred. For more information, please refer to Interpretation Bulletin IT-109R2, Unpaid Amounts.

We trust these comments are of assistance.

Yours truly,

Jenie Leigh
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch