25 April 1995 External T.I. 9503455 - 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:

Whether amounts qualify as retiring allowance

Position TAKEN:

General comments

Reasons FOR POSITION TAKEN:

Proposed transactions with identifiable taxpayers- should be a request for advance income tax ruling.

		  5-950345
XXXXXXXXXX		M. Shea-DesRosiers

Attention: XXXXXXXXXX

April 25, 1995

Dear Sir/Madam:

Re: Subsection 248(1) of the Income Tax Act (the "Act") - Retiring allowance

This is in reply to your letter of January 24, 1995, concerning the above-mentioned subject, which was addressed to the Registered Plan Division who forwarded it to our Division for reply. We apologize for the delay in replying to your letter.

As stated in your letter and in our telephone conversation of April 6, 1995 (XXXXXXXXXX/Shea-DesRosiers), your enquiry refers to specific taxpayers involved in proposed transactions. Written confirmation of the tax implications of proposed transactions are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R2. We offer, however, the following general comments.

To be a retiring allowance, the amount must be received upon or after retirement or be paid in respect of a loss of an office or employment. A distinction must be made between a retiring allowance and deferred compensation, such as where it is clear that the employee has taken a low salary in return for a generous so-called retiring allowance. A distinction must also be made between a non-funded retiring allowance plan and a non-funded supplementary pension plan where a registered pension plan already exists. Only when all the facts are known and the pertinent documents have been examined can a determination be made as to the type of plan in existence. The tax consequences are also different depending on the type of plan. If the payment is a retiring allowance, the amount is included in income pursuant to subparagraph 56(1)a)(ii) and an amount calculated pursuant to paragraph 60(j.1) of the Act can be transferred to an RRSP. However with a supplementary pension plan, the amount is simply included in income pursuant to paragraph 56(1)(a)(i) of the Act and no amount can be transferred to an RRSP.

A payment received on termination of an office or an employment, whether in a lump sum or on a periodic basis, is often capable of being characterized as both employment income and a retiring allowance. The distinction the Department makes between the two types of payments relies on the purpose for the payment - does the amount represent salary due under the contract of employment or rather compensation for the loss of employment?

Where employment has been terminated and payments are being paid by the former employer as a salary continuation in which regular employment benefits continue, the Department generally considers that the employment relationship has not been terminated and that the payments are actually regular salary or wages and taxable as such. This is so even where the employee is not required to report to work. In particular, pension benefits can only accrue to persons who are employees and, therefore, their presence indicates that there is an employment relationship. However, if the employer has entered into an approved downsizing program in accordance with section 8505 of the Income Tax Regulations, the awarding of additional lifetime retirement benefits under the pension plan will not, in itself, be regarded as an indication of continued employment.

In our view, if a program to reduce employment permits the employee the option of receiving a retiring allowance in a lump sum at the time of termination or in instalments over a number of years, and the employee chooses the instalment option at the time the employee agrees to voluntarily retire, the instalments are taxable in the year received. This is consistent with the Department's position that where the employment contract permits payment of a retiring allowance in instalments at the employee's option and the option is exercised on or before termination of employment, the instalments are taxable as received. Furthermore, it is our view that it is not necessary that the instalments be equal in amount, but any option to select the amount of each instalment must be exercised at the time of voluntary retirement and be irrevocable.

If, however, the program provides that a lump sum retiring allowance will be paid on or after voluntary termination of employment and no provision for payment in instalments is contained in the terms of the program, the full amount is taxable in the year it is due. Taxation of the full amount cannot be deferred by any accommodation by the employer to spread the payment over a number of years.

Where amounts are paid to compensate employees for a significant drop in earnings between the date they are laid off and their pensionable age, when they are entitled to receive a retiring allowance payment, and the employees agree, in return for the supplemental payments before pensionable age, to a reduction in the retiring allowance to be paid to them at a later date, such amounts would be treated as employment income. However, when the employees become eligible to receive the monthly retiring allowance payment after retirement, the amount paid will be treated as a retiring allowance if it qualifies as a payment to compensate the employees for their loss of employment or in recognition of their long service.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch