18 December 1989 Ruling 59121 F - Payment of a 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.

Dear Sirs:

Re:  Payment of a Retiring Allowance

This is in reply to your letter of November 20, 1989 wherein you requested our opinion as to the application of paragraph 60(j.1) of the Income Tax Act (the "Act") to the receipt of an amount in a hypothetical situation:

     An employee works for a company, Company X.

     All of the assets or all of the shares of Company X are acquired by a company with which it deals at arm's length, Company Y.

     Following this acquisition, the operations of Company X cease and the employment of the employee with Company X is terminated.

     Upon the employee's termination of employment with Company X, Company X pays the employee an amount not in excess of the monetary limits prescribed under paragraph 60(j.1) of the Act, having regard to the number of years during which the employee was employed by Company X.

     The employee transfers the full amount of the retiring allowance to his RRSP.

     Shortly thereafter, the employee commences employment with Company Y.

In our opinion paragraph 60(j.1) of the Act operates to allow within specified limits, the deduction of a "retiring allowance" when it is transferred to an RRSP. The provision does not, however, extend or modify the term itself which, as defined in subsection 248(1) of the Act, includes an amount received:

(a)     upon or after retirement of a taxpayer from an office or employment in recognition of his long service, or

(b)     in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account, or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal by the taxpayer or, after his death, by a dependent or a relation of the taxpayer or by the legal representative of the taxpayer."

In other words, a previous employer may pay a retiring allowance to an employee who retires at the time of the acquisition of its business by a successor and the amount may be deducted by the employee to the extent permitted under paragraph 60(j.1) of the Act upon its transfer to a registered retirement savings plan.  However, it is a question of fact whether or not the employee has retired at that time.

In our opinion, where an employee terminates his services with an employer in the circumstances described and there is no definite proposal for his subsequent continuation of employment by the successor company, then an allowance paid by the predecessor company may be characterized as a retiring allowance. On the other hand, where it is evident that the purchase by the successor company would not affect the employee's employment. It is our view that the employee will not be considered to have terminated his employment as required under the retiring allowance definition as provided in the Act.

We trust that these comments will be of assistance to you.

Yours truly

Wayne Douglasfor DirectorFinancial Industries DivisionRulings Directorate