2000 Ruling 2000-0041303 - RETIRING ALLOWANCE INSTALMENTS

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 series of payments from a taxpayer's former employer qualify as a retiring allowance for purposes of the Act?

Position: Yes.

Reasons: The payments are being received in respect of the taxpayer's loss of office or employment.

XXXXXXXXXX
XXXXXXXXXX 								2000-004130
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Taxpayer") (XXXXXXXXXX)

This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the Taxpayer, none of the issues involved in the ruling request

(i) is in an earlier return of the Taxpayer or a related person,

(ii) is being considered by a tax services office or tax centre in connection with a previously filed tax return of the Taxpayer or a related person,

(iii) is under objection by the Taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. The Taxpayer resides at XXXXXXXXXX.

The Taxpayer files his tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.

2. The Taxpayer was employed by XXXXXXXXXX (the "Employer") and its predecessor companies from XXXXXXXXXX until XXXXXXXXXX.

3. In XXXXXXXXXX, due to an integration of XXXXXXXXXX and their subsequent merger under the Employer, the Taxpayer's employment with the Employer was terminated effective XXXXXXXXXX. At the time of his termination, the Taxpayer was XXXXXXXXXX years old and earning an annual salary of $XXXXXXXXXX as an XXXXXXXXXX of the Employer.

4. In XXXXXXXXXX, the Employer sold the Taxpayer the Employer's leased vehicle he had been driving for $XXXXXXXXXX plus the fees and taxes charged by the leasing company.

5. At the end of XXXXXXXXXX, the Employer paid the Taxpayer a retention bonus of $XXXXXXXXXX (before withholding taxes) for continuing to be employed until the date of his scheduled termination on XXXXXXXXXX, and for completing his responsibilities in a manner satisfactory to the Employer. The Employer also paid the Taxpayer his outstanding vacation pay entitlements.

6. The Employer retained the Taxpayer as an independent contractor for the period XXXXXXXXXX, and the Employer paid him $XXXXXXXXXX for his contracting services. No further employment has been promised or agreed to by the Employer.

7. As part of its efforts to negotiate a settlement package with the Taxpayer, the Employer has continued to pay the Taxpayer his former salary and all benefits including the accrual of pension benefits under the Employer's registered pension plan (the "RPP").

8. On XXXXXXXXXX, the Employer and the Taxpayer agreed to terms of settlement in respect of the Taxpayer's loss of office or employment (the "Agreement"). The terms of the Agreement are as follows:

"(a) The Employer agrees to pay $XXXXXXXXXX to the Taxpayer in equal XXXXXXXXXX instalments, less all required withholding taxes, together with the continuation of all of his employment benefits (including the accrual pension benefits but excluding LTD, STD and participation in the Employer's Travel Accident Plan) until the first to occur of the following events:

(i) XXXXXXXXXX; and

(ii) the receipt of an advance income tax ruling from the Canada Customs and Revenue Agency that the payments provided under the Agreement will qualify as a retiring allowance for purposes of the Act. When the Employer receives a copy of the advance income tax ruling issued to the Taxpayer, the Taxpayer will cease to receive any employment income and all benefits (including the accrual of pension benefits under the RPP) and the Employer will pay a proportion of the gross amount of the Taxpayer's remaining monthly payment entitlements directly to the Taxpayer's registered retirement savings plan ("RRSP"). The proportion will be computed by taking the amount of retiring allowance that the Taxpayer is eligible to have transferred to his RRSP under paragraph 60(j.1) of the Act and dividing by the balance remaining to be paid by the Employer to the Taxpayer under the terms of the Agreement. Where the balance remaining to be paid by the Employer to the Taxpayer under the terms of the Agreement is less than the amount eligible to be transferred by the Taxpayer to an RRSP under paragraph 60(j.1) of the Act, each of the remaining payments will be paid directly to the Taxpayer's RRSP.

(b) In either of the above cases, in the event that the Taxpayer obtains alternate employment or becomes self-employed before XXXXXXXXXX, the payments noted in (a) above will be discontinued. The Taxpayer will be entitled to a lump sum payment equal to XXXXXXXXXX% of the remaining amount owing under (a) above at that time. The lump sum payment will be made to the Taxpayer where (a)(i) applies and to the Taxpayer's RRSP where (a)(ii) applies at that time. The Taxpayer is obligated to immediately inform the Employer of any employment which he may obtain or any self-employment which he may undertake.

(c) The Taxpayer has signed a release in a form satisfactory to the Employer".

Proposed Transactions

9. The Taxpayer will apply for an advance income tax ruling in respect of the amounts paid under the Agreement.

10. Upon receipt of the advance income tax ruling, the Taxpayer will forward a copy of the advance income tax ruling to the Employer. The Taxpayer will cease to receive any benefits from the Employer as of that date (including the accrual of any pension benefits under the RPP).

11. The Employer will commence to make the payments to the Taxpayer's RRSP in accordance with the Agreement.

Purpose of the Proposed Transactions

12. The purpose of the proposed transaction is to provide the Employer and the Taxpayer with the Canada Customs and Revenue Agency's confirmation that the amounts paid in respect of the Agreement will qualify as a retiring allowance for purposes of the Act.

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed as described above, we rule as follows:

A. The amounts paid by the Employer to the Taxpayer prior to the Employer's receipt of the advance income tax ruling will be employment income under subsection 5(1) of the Act.

B. The amounts paid by the Employer to the Taxpayer subsequent to the Employer's receipt of the advance income tax ruling, as described in 8. above will be a retiring allowance that will be included in the Taxpayer's income under subparagraph 56(1)(a)(ii) of the Act.

C. The proposed payments of the retiring allowance by the Employer, as described in ruling B, to the Taxpayer's RRSP will be deductible by the Taxpayer pursuant to paragraph 60(j.1) to the extent permitted therein.

The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate