10 June 1996 External T.I. 9606915 - REVIVED CORPORATION-CONTINUATION, 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1)Whether a revived corporation is a continuation of the predecessor corporation?

2)Whether a revived corporation can pay a retiring allowance to its employees based on the years of service both before revival and after revival?

Position:

1)Depends on the corporations Act which governs. In the present case, being an Alberta corporation, revival has a retroactive effect, but would not undo the fact that the corporate assets had been distributed to the shareholders.

2)Since, in the present case, the revival has a retroactive effect and the corporation is the same legal entity, subject to the usual requirements that the retiring allowance be reasonable etc., then the years of service prior to revival may be included in the calculation.

Reasons:

		960691
XXXXXXXXXX	V. Plant

Attention: XXXXXXXXXX

October 16, 2015

Dear Sirs:

Re: Retiring allowance-revived corporation

This is in reply to your letter of February 5, 1996 wherein you request a ruling regarding the proposed payment of a retiring allowance.

You described a situation involving a corporation governed by the Alberta Business Corporations Act which carried on an active business. The corporation's shareholders were employed full time as owner/managers of the active business. The business continued to operate until XXXXXXXXXX at which time the business was sold. The corporation continued to receive passive income from investments, resulting from the liquidation of the business, for the period from XXXXXXXXXX the remaining assets were distributed to the shareholders but the corporate charter was maintained until XXXXXXXXXX at which time the corporation was dissolved.

The shareholders throughout their employment history did not participate in any form of pension plan within the corporation. They did not receive compensation, on the sale of the business, in recognition of long service or in respect of loss of office or employment.

The shareholders are contemplating reinstating the corporation as an Alberta corporation to carry on certain business activities.

You have asked us the following questions:

1)Would Revenue Canada consider the reinstated corporation to be a continuation of the dissolved corporation in all respects, such as tax surpluses (capital dividend balances), safe income determination, as a goods and services registrant, balances of cumulative eligible expenditure pools, etc?

2)If the corporation is revived, the shareholders would become its employees. If the corporation were to pay a retiring allowance at some future date, how would the length of service for each employee be determined? Would the period of service include both pre and post revival employment?

3)Would the retiring allowance be deductible by the corporation?

Our comments

An advance income tax ruling, for which a fee is charged, is a written statement given by the Department stating how it will interpret specific provisions of the Income Tax Act (the "Act"). The interpretation is binding on the Department. As explained in Information Circular 70-6R2 and the related special release on the subject of advance income tax rulings, such rulings are given only in respect of proposed transactions. Further, a ruling cannot be provided where the transaction, such as the payment of the retiring allowance, is to be completed at some indefinite future time. The Income Tax Rulings and Interpretations Directorate is unable to provide opinions concerning the interpretation of the Act as it applies to specific fact situations, except in the context of an advance ruling. The following comments, therefore, are general in nature and are not binding on the Department.

There is no provision in the Act dealing with the revival of a corporation, so the consequences will be determined by the applicable corporate law. If a corporation is revived under section 201 of the Alberta Business Corporations Act, subsection 201(4) states that:

"A corporation is revived on the date shown in the certificate of revival and, subject to any reasonable terms that the Registrar may impose and to rights acquired by any person prior to the revival, the corporation is deemed to have continued in existence as if it had not been dissolved."

This generally implies that the revived corporation is the same legal entity as the dissolved corporation. However, where all the assets of the corporation were distributed to the shareholders prior to dissolution, there would not be any safe income on hand from which a dividend could be paid after revival of the corporation. Likewise, where the assets were distributed to the shareholders, the subsequent revival of the corporation would not affect any terminal losses, capital losses or capital gains arising on the disposition of those assets, nor would any tax accounts such as cumulative Canadian exploration expense be reinstated.

Given that the revived corporation would be the same legal entity as the corporation that was dissolved, then the same GST registration number would be maintained; a new account would not need to be opened. Reinstatement of the previous GST registration number (and assignment of a Business Number) would be done by contacting the Calgary Tax Services Office.

Retiring allowance is defined in subsection 248(1) of the Act to mean an amount received by an individual upon or after retirement from an office or employment in recognition of one's long service or in respect of a loss of office or employment. It is a question of fact whether or not a particular payment qualifies as a retiring allowance. Accordingly, the issue has to be decided on a case-by-case basis having knowledge of all the relevant facts.

Where an amount received after retirement can reasonably be considered to be deferred compensation, it is taxable as income from an office or employment when received. Such an amount would be included in the individual's income and would not be deductible under paragraph 60(j.1) of the Act.

We note that subsection 60(j.1) of the Act refers to the "number of years during which the employee... was employed by the employer or a person related to the employer". Therefore the years of service with the particular employer may be either continuous or discontinuous. When the employees retire from their employment with the corporation, it would appear to be reasonable to consider both the pre and post revival period of employment in calculating the number of years of service, given that the ABCA provides that the corporation is deemed to have continued in existence as if it had not been dissolved.

You also ask for our views concerning the deductibility by the corporation of the amount of retiring allowance to be paid. An amount paid to an employee as a retiring allowance is subject to the general limitation provided in section 67 of the Act. The amount paid to the employee must be reasonable in the circumstances, i.e. the employee's length of service, the relationship of the amount of the retiring allowance to the remuneration received for the years of service, and the value of the pension and other retirement benefits to which the employee is entitled in respect of the service. In order for the amount of a retiring allowance to be considered reasonable in a non-arm's length situation, it should not exceed the amount that would be considered reasonable in an arm's length situation. Generally, the Department will consider an amount not exceeding the amount eligible for deduction pursuant to paragraph 60(j.1) of the Act in respect of the employee to be a reasonable amount for this purpose.

We trust our comments will be of assistance to you.

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch