23 February 2000 External T.I. 1999-0015035 - 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: Will a severance payment be a retiring allowance if the employee being terminated independently seeks and obtains employment with an affiliate before receiving the severance?

Position: No.

Reasons: Strict application of the wording of IT-337R3 par. 3(b) and Technical News No. 7.

XXXXXXXXXX 			1999-001503
G. Kauppinen
Attention: XXXXXXXXXX 

February 23, 2000

Dear Sirs:

Re: Retiring Allowance

This is in reply to your letter dated December 20, 1999. You have asked our opinion as to whether a severance amount paid to a terminated employee can be considered to be a retiring allowance if the employee has made arrangements (without the knowledge of the employer who will pay the severance and before the payment of the severance) to become employed by an affiliate of the employer.

Your query relates to the definition of "retiring allowance" in subsection 248(1) of the Income Tax Act (the "Act") and the position of the Canada Customs and Revenue Agency (the "Agency") as contained in Interpretation Bulletin IT-337R3 (Retiring Allowances) (the "I.T."). In order for an amount to be considered a "retiring allowance" the Act states that it must be received "after retirement ... from an office or employment in recognition of ... long service, or in respect of a loss of an office or employment". In interpreting these phrases, the Agency makes the following statement in the I.T. at subparagraph 3(b) therein:

3. Retirement or loss of an office or employment does not include: ... (b) termination of employment with an employer followed by ... employment with an affiliate of the employer pursuant to an arrangement made prior to the termination of employment.

This position was discussed in Technical News No. 7 which stated:

We did not intend to place a temporal limit on the period after termination of the employment in which an individual could not be hired by an affiliate. Instead, the intention was to deny retiring allowance treatment of payments made by the employer where arrangements have been made for the individual to obtain employment with an affiliate. If there is no assurance or offer of a new employment with an affiliate at the time the individual ceases the employment, then we will consider a loss of employment or retirement to have occurred.

If retiring allowance treatment is denied, the amount will be considered employment income taxable in accordance with subsection 5(1) of the Act and subject to withholding tax in accordance with subsection 153(1) of the Act. No deduction from the employee's income under paragraph 60(j.1) of the Act will be available with respect to the transfer of any part of the amount to the employee's registered retirement savings plan ("RRSP") and, if such a contribution is made, it will be subject to the employee's RRSP deduction limit. An amount paid to the RRSP in excess of the RRSP deduction limit may be subject to the Part X.1 over-contribution tax.

We trust our comments will be of assistance.

Yours truly,

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