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: Are salary continuance payments considered employment income or a retiring allowance?
Position: Payments are considered employment income.
Reasons: Pension benefits continue to accrue to the employees. Therefore, an employment relationship exists and payments are considered to be employment income.
XXXXXXXXXX 2009-035079
A. Townsend
May 5, 2010
Dear XXXXXXXXXX :
Subject: Salary Continuance Payments
This is in response to your letter of November 30, 2009, questioning whether the salary continuance payments offered to departing employees as part of a Workforce Reduction Program will meet CRA guidelines as a "salary continuance".
The Workforce Reduction Program described in your letter offers departing employees the option to receive their severance/retiring allowance as a lump sum or in the form of salary continuance. If an employee elects salary continuance, the employee will be eligible for health and dental benefits and their pension credits will continue to accrue.
The particular situation outlined in your letter appears to relate to a factual one, involving specific taxpayers. 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 submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
Whether an amount received by an employee upon or after termination of employment is considered salary, wages or other remuneration which is included in income under subsection 5(1) or a retiring allowance that is included in income under subparagraph 56(1)(a)(ii), is a question of fact. Such a determination can only be made after a review of all of the relevant facts in the particular situation, including the employment contract and any other employment agreements.
Generally, a "retiring allowance" is defined in subsection 248(1) 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. To be considered a retiring allowance there must be a connection between the loss of employment and the subsequent receipt of the allowance.
Continued participation in a former employer's health plan for a restricted period of time may indicate continued employment but this fact 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. However, CRA has taken the position that where pension benefits continue to accrue to the individual, an employment relationship continues to exist as pension benefits only accrue to employees even though the individual is not required to report to work.
In your situation, the departing employees that choose the salary continuance option continue to accrue pension credits. Therefore, the CRA would consider an employment relationship to exist and the salary continuance payments would be taxable as salary under subsection 5(1).
We trust these comments are helpful.
Yours truly,
Louise J. Roy, CGA
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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