1 September 1995 Internal T.I. 9520916 - RETIRING ALLOWANCE OR PAY IN LIEU

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 early retirement payment is an amount to which employee would be entitled.

Position TAKEN:

Depends on real nature of payment.

Reasons FOR POSITION TAKEN:

If it is pay in lieu of reasonable notice, then employee is otherwise entitled; if compensation or incentive to leave position, then no "other" entitlement and 8503(15) not offended.

			September 1, 1995

HEADQUARTERS HEADQUARTERS
Registered Plans Division P. Spice
Stella Black (613) 957-8953
Director
952091

Application of Subsection 8503(15)

This is in reply to your memorandum of August 3, 1995, and further to our telephone conversations of July 13, 1995 (Spice/Hollinger), and August 11, 1995 (Spice/Black). Attached to your memorandum were copies of letters of May 18, 1995, and July 14, 1995, from XXXXXXXXXX describing their early retirement program and requesting your opinion on the application of the above-noted provision of the Income Tax Regulations (the "Regulations"). You have asked us for our views and the following describes the relevant facts, the issue, our analysis, and conclusion.

FACTS

As a result of a reorganization of
XXXXXXXXXX

employees will be offered early retirement under an early retirement program. It is not certain that the XXXXXXXXXX employees will have their employment terminated as a result of the reorganization but they are at risk.

The employees will be offered a "discretionary retiring allowance" which will be an amount

XXXXXXXXXX

XXXXXXXXXX

ISSUE

Whether that portion of the "discretionary retiring allowance" described in (b) above which goes to fund the employee's pension benefits is a contribution paid by the employer "with the consent of the member, in lieu of a payment or other benefit to which the member would otherwise be entitled" (paragraph 8503(15)(c) of the Regulations).

ANALYSIS

In the Technical Notes the Finance Department explains that the purpose of subsection 8503(15) of the Regulations is to prevent an employee from agreeing to "reduced salary or wages or a reduced retiring allowance" in return for employer-funded past service pension benefits in respect of pre-1990 service. Such funding would circumvent the past service contribution limits set out in subsection 147.2(4) of the Act.

In order to invoke 8503(15) in the XXXXXXXXXX situation the Department would have to be satisfied that the "discretionary retiring allowance" is an amount to which the employee "would otherwise be entitled". (As you noted in our telephone conversation of July 13, 1995, we have previously concluded that the entitlement may be a concurrent one and can arise in connection with the negotiation of the employee's termination - see our memoranda of May 8, 1990 (900515), and October 28, 1993 (932607).)

Although XXXXXXXXXX has explained that the employee has no right to an amount if the early retirement option is refused, this does not answer the concern. The issue is whether, if the employee accepts the early retirement, the employee is "otherwise entitled" (i.e. otherwise than by virtue of the early retirement offer) to the amount? If so and the amount is contributed to the pension plan, it constitutes a payment by the employer, with the consent of the employee, of an amount to which the employee is entitled.

In our view an employee is entitled to the full amount because the amount is due under the employment contract as employment income; therefore, upon any termination (except upon mandatory retirement or unilateral resignation by the employee where there is no notice requirement) the amount is due. To elaborate further, in both the May 18 and July 14 letters, reference is made to the amount offered as an amount "in lieu of reasonable notice". Where an amount is paid in lieu of reasonable notice, it is paid for the purpose of satisfying the employer's obligation to pay salary: the employee is entitled to it.

It is not sufficient for XXXXXXXXXX to refer to the discretionary nature of the offer and cite the written and oral advice to employees that they were not guaranteed termination and the consequential "retiring allowance in lieu of reasonable notice" should they refuse the early retirement offer. The description of the payment as both discretionary and as satisfying the reasonable notice requirements is contradictory. The last sentence from the July 14 letter reproduced above supports a conclusion that the employee is entitled to the amount otherwise than by virtue of the employer's offer - the amount offered under the early retirement program is equal to the amount the employee is entitled to receive upon termination without cause. If the employee agrees to the termination of employment through acceptance of the early retirement option, the employee is entitled to the pay in lieu of the reasonable notice.

We noted above the statement in the May 18 letter that the amount in question is in excess of what is required under the employment standards legislation and the employment contract. This cannot be so. Pay in lieu of reasonable notice is salary which is due under the employment contract, notwithstanding the fact that the period of reasonable notice and thus the amount of the pay due may not be known and/or acknowledged until the time of termination.

In this respect, note the comments in Kok v. MNR 80 DTC 1762 (TRB) at 1764:

It appears to me that in most of the employer/employee relationships, a notice of dismissal though often not specifically referred to in an employment contract, is generally accepted as a necessary requirement to prevent an employer from arbitrarily dismissing an employee, without giving him any opportunity of finding some other employment.

CONCLUSION

If the amount is pay in lieu of reasonable notice, the payment offered under the early retirement program is a payment or other benefit to which the employee would otherwise be entitled at the time the offer is accepted (i.e., concurrent entitlement) and, if used to fund pension benefits in respect of pre-1990 service, is caught by the provisions of subsection 8503(15) of the Regulations.

If the amount is for loss of employment (which would include pay as an incentive for early retirement) and any obligation by XXXXXXXXXX to provide reasonable notice has been satisfied by a separate payment or by actual notice, then the amount offered under the early retirement program could be used to fund the pension benefits, and subsection 8503(15) would not apply.

OTHER MATTERS

XXXXXXXXXX should also be advised that if the amount is pay in lieu of reasonable notice, it is employment income and taxable under subsection 5(1) of the Act; it therefore cannot be the subject of a deduction under paragraph 60(j.1) of the Act upon its contribution to a registered retirement savings plan as proposed under their plan with respect to the amount described in (a) above.

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