15 February 2007 External T.I. 2006-0202981E5 - Retirement Allowance - Income Tax Withholding

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 legal fees should reduce the base amount for computing income tax withholding

Position: No

Reasons: Unless a portion of the retiring allowance is specifically identified as a reimbursement of legal fees, the base amount for tax withholding purposes cannot be reduced other than by amounts set out in Reg. 100(3). .

								2006-020298
XXXXXXXXXX 							Jack Szeszycki
(613) 957-8972
February 15, 2007

Dear XXXXXXXXXX:

Re: Retirement Allowance and Income Tax Withholding

We are responding to your letters of October 25, 2005 and January 23, 2006, in which you requested our views as to the proper income tax withholding required under the circumstances described therein. We regret the delay encountered in providing a reply.

In your enquiry you describe a situation in which a settlement had been negotiated on behalf of your client with respect to a wrongful dismissal claim and a payment in respect of that settlement was to be issued to your firm, in trust for your client, with the appropriate withholding for income tax. You further indicated that the firm's fees in respect of its representation of your client in the matter would significantly reduce the amount forwarded to the client. It is your view, therefore, that the base amount upon which the payer computes the required income tax withholding should reflect this reduction. You have asked for our technical views on the matter.

The general provision that governs the requirement to withhold amounts on account of the payee's income tax liability is subsection 153(1) of the Income Tax Act ("the Act"). Paragraph (c) of that provision indicates that retiring allowances are among those types of payments from which income tax must be withheld. The definition of "retiring allowance" contained in subsection 248(1) of the Act includes amounts in respect of the loss of an office or employment.

The Agency's position with respect to the treatment of retiring allowances is contained in IT-337R4 (Consolidated) - Retiring Allowances. At paragraph 25, the bulletin describes the withholding requirements as those determined by the application of Regulations. More specifically, the various provisions of section 100 of the Regulations set out the rules for making that determination, including, and limiting, the types of deductions that can be carved out of a payment of remuneration to arrive at the base amount for computing the appropriate amount to be withheld. In general terms, unless the legal fees are specifically identified as a reimbursement, the base amount for income tax withholding purposes cannot be reduced other than by amounts set out in subsection 100(3) of the Regulations.

However, if a specifically identifiable portion of the payment is a reimbursement of legal fees, that amount is not treated as a retiring allowance that is taxable under subparagraph 56(1)(a)(ii) of the Act. Such a reimbursement is included in the employee's income under paragraph 56(1)(l.1). On that basis, the payer could withhold on the net amount. It should be noted that whether the taxpayer is entitled to a deduction for all or a portion of the legal expenses would have to be determined under paragraph 60(o.1) of the Act. Further, the payer is still responsible for reporting the total amount on a T4A slip and information return.

We trust our comments are of assistance.

Yours truly,

Randy Hewlett
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch