28 April 1992 Income Tax Severed Letter - Reasonableness 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.

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.

SUBJECT: REASONABLENESS OF A RETIRING ALLOWANCE SECTION: 56(1)(a)(ii), 248(1)]

PRAIRIE TAX CONFERENCE

May 19 & 20, 1992

DRAFT/EBAUCHE Question 10

For a payment to be considered a retiring allowance and a deductible expense to the payer, the amount of the payment must be reasonable having regard to the length of service involved, its relationship to the remuneration received for the years of service and the value of other retirement benefits to which the employee is entitled. In order for the amount of a retiring allowance to be considered reasonable in a non-arm's length situation, it should not exceed the amount that would be considered reasonable in an arm's length situation.

In one private opinion letter, the Department considered that it was not likely that a reasonable arm's length allowance would exceed 2 1/2 times the average salary for the last five years, minus the total of any amounts the employee would be entitled to receive on retirement in respect of deferred profit sharing plans, registered pension and registered retirement savings plans. As well, the Department indicated in the letter that the amount eligible for rollover under paragraph 60(j.1) of the Act to an RRSP would generally be accepted as reasonable. In such vein, one would refer to the number of years of service and for this purpose, the Department has indicated that gaps in an employee's work history with a particular employer would not disqualify the previous years, that part of a year would be counted as one year and that a year in which little, if any, remuneration was paid would count.

• 1. What is the Department's position on the characterization of a payment as a retiring allowance and its deductibility to the payer where the quantum of the payment satisfies the above criteria but it is spread over a 2 or 3 year period?
• 2. What is the Department's position where the maximum potential amount of the payment satisfies the above guidelines but the ultimate amount of the payment is contingent on the profitability of the payer?

Department's Position

Generally speaking, where the amount of a payment that otherwise qualifies as a retiring allowance is considered reasonable based on the above criteria, the characterization of the payment as a retiring allowance or the deductibility of the amount will not be affected by the fact, in and of itself, that the amount is to be paid in instalments over a 2 or 3 year period. Consideration, of course, would have to be given to subsection 78(4) of the Act in determining the year in which the amount would be deductible.

The fact that an amount is contingent, and thus not deductible, at the time an individual retires does not necessarily mean that the amount cannot qualify as a retiring allowance. Although it is recognized, as evidenced by subsection 78(4) of the Act, that the related expense can be incurred in a year prior to the year a retiring allowance is paid to an individual, the determination of whether or not the payment is a retiring allowance (or an instalment payment of an amount that is a retiring allowance) will normally be made at the time the payment is received by the individual, since the retiring allowance definition reads "an amount...... received". Where the total of the payments made to an individual is reasonable based on the above criteria and otherwise qualifies as a retiring allowance; i. e., it is paid as a consequence of retirement or loss of office or employment and not as a consequence of an individual's participation in the profits of the employer, the fact that the timing of the payments is determined on the basis of the employer's profitability would normally not of itself affect the characterization of the payments or their deductibility.

Author: D. Delorey
May 28, 1992