11 April 2003 External T.I. 2003-0009485 - RETIRING ALLOWANCE TRANSFER OF BUSINESS

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 CCRA.

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

Principal Issues:

1. Are employees eligible to receive a retiring allowance?

2. Will years of service with previous employers count?

Position:

1. Question of fact.

2. Yes.

Reasons:

1. Need all of the facts to determine if there is a loss of office or employment.

2. Appears employers could be related under 60(j.1)(iv) and/or (v).

XXXXXXXXXX 			2003-000948
G. Kauppinen
April 11, 2003

Dear XXXXXXXXXX:

Re: Retiring Allowances

This is in reply to your letter dated January 22, 2003 to the XXXXXXXXXX Tax Services Office that was forwarded to us for reply.

You ask for our views on the application of paragraph 60(j.1) of the Income Tax Act ("Act) with respect to transfers of retiring allowances to a registered retirement savings plan ("RRSP") where a government department has been incorporated.

Our Comments

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, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address:

http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

The CCRA's general views regarding retiring allowances are found in Interpretation Bulletin IT-337R3 entitled Retiring Allowances.

Paragraph 3 of IT-337R3 discusses the question of whether an employee is considered to have retired or suffered a loss of office or employment. We note that retirement or loss of office or employment will not exist where an employee transfers from one office or position to another with the same employer or with an affiliate of the employer. In determining whether the employees in your situation are eligible to receive a retiring allowance, you will have to look at the relationship between the government department and the incorporated entity. Where they are considered related for purposes of the Income Tax Act (the "Act"), the employees would not be entitled to receive a retiring allowance because there is no retirement or loss of office. For instance, if the incorporated entity is incorporated without share capital and the government has the ability to control the incorporated entity's Board of Directors (i.e. naming the members of the board), we would consider the government department and the incorporated entity to be related for purposes of the Act. This determination is a question of fact.

Paragraphs 12 and 13 of IT-337R3 discuss the amounts that may be transferred to an RRSP. Assuming that the employees are eligible to receive a retiring allowance, we will provide general comments regarding the computation of the amount that may be transferred to an RRSP.

Under clause 60(j.1)(ii)(A) of the Act, a taxpayer is allowed to transfer $2,000 of his or her retiring allowance to an RRSP on a tax deferred basis for each year before 1996 that he or she was employed by the employer paying the retiring allowance, or by a person related to the employer. Also, under clause 60(j.1)(ii)(B) of the Act, the taxpayer is allowed to transfer an additional $1,500 of the retiring allowance to an RRSP on a tax deferred basis for each year before 1989 that he or she was employed by the employer or a person related to the employer but had no vested rights in respect of a pension plan or deferred profit sharing plan ("DPSP") of the employer or a person related to the employer.

In counting eligible years for the transfer under paragraph 60(j.1) where the employer has changed, subparagraphs 60(j.1)(iv) and (v) expand the meaning of "person related to the employer" for the purposes of clauses A and B of subparagraph 60(j.1)(ii) described above.

Specifically, a "person related to the employer" includes any person whose business was acquired or continued by the employer (60(j.1)(iv)) and a previous employer of the retiree whose service is recognized in determining the retiring employee's pension benefits (60(j.1)(v)). Note the extended definitions described herein are mutually exclusive and only one need be satisfied.

In applying subparagraphs 60(j.1)(iv) and (v) it may be helpful to consider clauses A and B of subparagraph 60(j.1)(ii) one at a time. That is clause 60(j.1)(ii)(A) picks up all years of employment with a former employer (before 1996) where that business is acquired or continued by the current employer by virtue of subparagraph 60(j.1)(iv). Alternatively (or concurrently redundant) clause 60(j.1)(ii)(A) picks up all the years of employment with a former employer where any part of those years with the former employer is recognized by the current employer in determining the employee's pension benefits (paragraph 13(c) of Interpretation Bulletin IT-337R3, Retiring Allowances). Consequently, where the condition in either subparagraph 60(j.1)(iv) or in subparagraph 60(j.1)(v) is satisfied, the former employer is entitled to use the years of service with the former employer in determining the amount of the retiring allowance that may be transferred to an RRSP under paragraph 60(j.1) of the Act. The same rule would apply with respect to determining the amount eligible under clause 60(j.1)(ii)(B) of the Act. However, eligibility for the additional $1,500 under clause 60(j.1)(B) for a former employer that is a "person related to the employer" will still depend upon the number of years that the employee was not a member of the former employer's pension plan or DPSP.

We trust our comments will be of assistance to you.

Yours truly,

Mickey Sarazin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch