Retiring Allowance


Freitas v. The Queen, 2017 TCC 46 (Informal Procedure), rev'd in part 2018 FCA 110

s. 96(1.1) allocation of income from an accounting firm was business income rather than a retiring allowance

The taxpayer, who retired as a partner of Deloitte & Touche LLP in 2007, received a share of the partnership income in his 2008 taxation year pursuant to ITA s. 96(1.1) of the ITA as a retirement allowance and that consequently, it was exempt from Canada Pension Plan contributions. In finding that this amount was not a retiring allowance as defined in ITA s. 248(1) and, therefore, not excluded from being subject to CPP contributions, Campbell J stated (at para 12):

Since this definition [of retiring allowance] specifically references retirement from an office or employment, the Appellant’s income cannot be a retiring allowance. … Since this income falls into the category of business or professional income pursuant to subsection 96(1.1) of the ITA, the Minister was correct in including it in the calculation of his self-employed earnings for the purposes of sections 13 and 14 of the CPP.

A CRA statement (9527946) that “Income allocated pursuant to subsection 96(1.1)… for the purposes of the CPP provision is not considered to be from a business carried on by the retired partner and consequently such a partner is not required to contribute to CPP solely as result of receiving such income,” was incorrect, as was a Deloitte opinion that “his income was exempt from Canada Pension Plan contributions as it was a retiring allowance under subsection 96(1.1)” (para. 16).

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Canada Pension Plan - Section 14 ITA s. 96(1.1) allocation of professional income was included 113

Forest v. Canada, 2008 DTC 6506, 2007 FCA 362

The Court varied a finding of the Tax Court Judge that the full $152,969 received by the taxpayer was a retiring allowance and instead found that only $23,050 of the sum was a retiring allowance in light of the policy of his employer to pay severance of one month for each year of employment. Accordingly, the balance of the sum received by him was an exempt receipt that was in respect of his action against his employer for harassment.

Schwartz v. Canada, 96 DTC 6103, [1996] 1 SCR 254

The taxpayer received $400,000 in settlement of his claim for damages following the repudiation by a company ("Dynacare") of its agreement to employ him as a senior vice-president. La Forest J. found that because at the time of the repudiation, the taxpayer was not yet an employee of Dynacare, the amount received by him could not qualify as a retiring allowance.

Merrins v. The Queen, 94 DTC 6669 (FCTD)

The taxpayer was unsuccessful in his argument that $60,000 paid to him pursuant to an award of an arbitrator and following the filing of a grievance by him in respect of being laid off by his employer, should be regarded as compensation for the extinction of the right to have his grievance arbitrated and, therefore, as the disposition of a chose in action. Pinard J. noted that the words "in respect of" have been found to be words of wide import and there clearly was a connection between the $60,000 award and the loss of the taxpayer's employment.

In response to a further submission that the arbitrator's award was invalid, Pinard J. stated (p. 6670) that:

"What is important is the fact that the award was not challenged and that the amount of $60,000 was received and the benefit accepted by the plaintiff".

The Queen v. Albino, 94 DTC 6071 (FCTD)

In 1973, the taxpayer agreed to participate in an "incentive performance plan" of his employer under which the taxpayer was granted "share equivalent units" from time to time which "vested" between five and ten years after the date of granting and which provided for payments being made only upon the taxpayer ceasing to be an employee. Given that one of the two objectives of the plan was to provide an incentive for important employees to remain with the company (the other being to provide an incentive for such employees to continue devoting their energies towards the continued growth of the company), a lump sum in excess of $600,000 received by the taxpayer when he was terminated by the company in 1987 was a retiring allowance rather than remuneration under ss.6(3) and 5(1) and, therefore, was subject only to tax in accordance with s. 212(1)(j.1) of the Act.

Paquin v. The Queen, 90 DTC 6663 (FCTD)

On October 23, 1978 it was agreed that the taxpayer's employment would terminate effective December 31, 1978. This latter date was the effective date of the termination of his employment for purposes of s. 56(1)(a)(viii) (which came into effect on November 16, 1978) given that his duties of employment continued into December 1978.

Lorenzen v. The Queen, 81 DTC 5251, [1981] CTC 377 (FCTD)

The taxpayer arranged for the transfer of the assets of one company to a second company that was also controlled by him. Although the taxpayer was paid $20,000 in respect of relinquishing the presidency of the first company, it could not be said that he received this amount in respect of "loss" of office because he engineered the termination of office himself, and he suffered no loss because the business was carried on by him as before. Similarly, there was no "retirement" because he remained a director of the first company and he continued with the same business at the second company. [C.R.: S.56(1)(a)(ii)]

Girouard v. The Queen, 80 DTC 6205, [1980] CTC 284 (FCA)

Amounts paid pursuant to a liquidated damages clause in an employment contract in respect of loss of employment were found to have the same character for tax purposes as amounts paid pursuant to settlement agreements concluded after the time of dismissal.

Choquette v. The Queen, 74 DTC 6563 (FCTD)

Before finding that an amount received by the taxpayer did not qualify as a retiring allowance under the definition in the pre-1972 Act (and after finding that the sum was deemed to be remuneration under what now is s. 6(3) of the Act), Décary J. stated (at p. 6568) that "I cannot believe that an employment of 29 months can constitute long service".

See Also

Moorthy v Revenue and Customs, [2018] EWCA Civ 847

non-taxable receipts of an employee for “injury” included damages received for hurt feelings

Following a restructuring of his employer, the taxpayer was made redundant and terminated in 2010. Following a mediation, the taxpayer settled his claim for unfair dismissal and unlawful age discrimination for the sum of £200,000. The two issues were "the taxability issue" --whether the settlement sum was taxable employment income as "payments and other benefits which are received [by the relevant person] directly or indirectly in consideration or in consequence of, or otherwise in connection with- (a) the termination of a person's employment"; and, if so, "the exemption issue" --whether the settlement sum (or any part of it) was taken out of the above charge to tax by a statutory exemption (“s. 406”) for a payment provided "on account of injury to … an employee", the alleged injury being the injury to the taxpayer's feelings sustained in the context of his age discrimination claim.

After finding against the taxpayer on the first issue, Underhill LJ found that £30,000 of the £200,000 was eligible for the exemption, stating (at paras. 79-80):

It seems to me that to treat an award of damages for injured feelings, in respect of actionable discrimination on grounds of age, as falling within the exemption in section 406 would accord with the natural meaning of the language of the section, would provide parity of treatment with similar awards made in a continuing employment relationship, and would not be objectionable on policy grounds. The Vento guidelines show that such awards, if made by a court or tribunal, must be relatively modest in amount, and any attempts to obtain exemption for much larger sums under the guise of a settlement of a discrimination claim would no doubt be rigorously scrutinised by the FTT. The absence of any policy objection to the exemption of payments within the Vento guidelines is brought out by the fact that, until quite recently, HMRC themselves appear to have accepted in many cases that section 406 does indeed apply in those circumstances, and by their offer in the present case to allow exemption for £30,000 of the payment made to …[the taxpayer] in order to reach a settlement with him.

For the avoidance of doubt, I should make it clear that I express no view on the question whether the exemption might also in principle apply to payments made in respect of injury to feelings where no statutory basis for such a claim could exist.

Words and Phrases

Abenaim v. The Queen, 2017 CCI 223

amount received by a terminated employee (claiming oppression) exceeding 18 months’ salary was non-taxable

The taxpayer’s company for selling and leasing office equipment was merged in 1986 with a Minolta company to form Minolta Montreal, with 24% of the shares being held by the taxpayer. In 1990, he was terminated as manager. After bringing an oppression action, he entered into a settlement agreement pursuant to which he received a damages payment, sold his shares and was appointed Chief Operating Officer. In 2003, the Minolta companies were acquired by Konica, and Minolta Montreal was renamed KM Montreal. In 2006, the taxpayer was again terminated, and brought an action in which he claimed (in the event that his position at KM Montreal was not restored) for damages as compensation in lieu of notice of $1.5 million and a further $1.5 million in damages for suffering [“dommages moraux”].

In June 2009, in the course of a judicial mediation process of the Quebec Superior Court, the taxpayer entered into a settlement agreement with the KM group in which it agreed to pay a (redacted) lump sum and which contained a clause providing that the payment would be effected in a tax-advantageous manner. However, the release drafted by KM to reflect this settlement simply treated the whole amount as taxable, which the taxpayer agreed to given his absence of funds to reopen the litigation. In due course, he received a T4 describing the full amount as a retiring allowance.

In finding that a substantial portion of the lump sum was a tax-free receipt, D’Auray J stated (at paras. 104, 108, 110, 113, 116-117, TaxInterpretations translation):

[T]his action was principally one in oppression pursuant to subsection 241(1) of the Canada Business Corporations Act… .

…[T]he relations between the Minolta Group and KM, and Mr. Abenaim, bore the stamp of oppression throughout. Furthermore, … without having made an oppression claim, Mr. Abenaim would never have received an amount of [confidential]. …

Schwartz indicates that, where it is established that a payment has a dual aspect, the bar for determining its allocation is not that high. …

In this case, I am of the view that the best approach in determining the breakdown of the amount received by Mr. Abenaim is to refer to the civil action. …

The [confidential] amount is well in excess of the amounts accorded by the courts in Quebec… . However,, it has been clearly established that the judicial guidelines had no impact on the amount paid to Mr. Abenaim. … According to the judicial guidelines, compensation in lieu of notice in this case would be $390,000. [F.n. 18: Compensation for 18 months on an annual salary base of $260,000.]

Consequently, I am of the view that the amount of [confidential] represents non-taxable damages for suffering. The difference of [confidential] represents compensation in lieu of notice and/or amounts respecting the employment contract, which would be taxable by virtue of the ITA.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 3 - Business Source/Reasonable Expectation of Profit oppression damages were non-taxable 107

Girard v. Agence du revenu du Québec, 2017 QCCQ 3245

momentary employment by a new employer was sufficient to render termination damages as a retiring allowance

The Québec government decree that some municipalities were to be amalgamated to form the Ville de Saguenay (the “City”) also stipulated that a transition committee would appoint a Director General (i.e., chief executive) for the new City. The committee would terminate upon the formation of the new City, which would inherit its assets and liabilities. The committee appointed the taxpayer as Director General for a fixed term beginning September 13, 2001 and ending September 13, 2006. The taxpayer moved to Saguenay in 2001, and started preparatory work with the committee. He completed his posting with the committee on February 17, 2002, reported for duty as Director General of the City on February 18, 2002, and was suspended from duty the following day by the mayor (Mr. Tremblay). His dismissal was ratified at a meeting held on February 25, 2002. Pursuant to an award of the Superior Court, the taxpayer received a payment in 2011 comprising $378,391.45 of "net capital" and $264,298.81 as an interest award.

The taxpayer argued (at para. 28) that the award was not a “retiring allowance” (defined in s. 1 of the Taxation Act essentially the same as in the ITA) because he was never in the service of the City, and cited in this regard Schwartz and Robinson. In rejecting this submission, Lavoie JCQ stated (at paras 43- 45, TaxInterpretations translation):

The new City of Saguenay could not with impunity deprive him of the status of Director General. Today, the taxpayer cannot divest himself from the role he played as Director General of the City of Saguenay on February 18, 2002 and in the following days, until he was dismissed from its services. It was the City of Saguenay and its mayor who took away his status as Director General of the newly amalgamated local authority. And it was this action that was found to be wrongful by… the Superior Court and for which the appellant obtained compensation.

The appellant cannot therefore claim that there was no causal link between what he received as compensation and his employment as Director General on February 18, 2002.

With respect, it would be purely artificial or fictitious to recognize him as having a tax status that was detached from the function he performed at that date. The very short duration of this employment from the beginning of the existence of the new city to his dismissal…does not allow us to discard the notion that he was compensated for losing employment that had been acquired by him.

Robinson v. Québec (Sous-ministre du Revenu), 2010 QCCQ 6481

non-taxable damages arose from refusal of new successor City to hire taxpayer

The taxpayer, who had for a long time been providing his legal services as independent contractor to the City of Gatineau, became an employee of the City prior to its already proposed amalgamation. His employment contract did not extend beyond the proposed date of amalgamation, as the current City did not have the power to provide a contract of employment beyond that date. As expected, the City was amalgamated effective the beginning of 2002. The amalgamated City offered him a position which was inferior to his former position. He rejected this offer.

In finding that damages of $102,775 received by the taxpayer were not taxable to him, Gosselin JCQ stated (at para. 118, TaxInterpretations translation):

[N]one of these damages were caused, it may be recalled, by the loss as everyone expected in 2001 of employment, which ceased to exist on December 31 of that year. It was not the termination of his employment at the date provided in the contract of employment between Mr. Robinson and the former City of Gatineau which was the origin of the alleged damages to his reputation, troubles, inconvenience and violation of his rights but, rather, the decision of the new City to not integrate him into its management staff.

Saardi v. The Queen, 99 DTC 767 (TCC)

A lump sum of Cdn.$50,000 that the taxpayer received from his former U.S. employer was found to have been received not from his loss of employment but, rather, from the settlement of his claim for amounts due by the employer before his loss of employment. Accordingly, the amount was not a retiring allowance.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) 48

Tremblay v. The Queen, 2009 DTC 1558, 2009 TCC 437

A lump sum of approximately $2.5 million received by the taxpayer, an executive, on the termination of his employment pursuant to a Settlement Agreement that stated that the payment "will be characterized as a Retirement Allowance" received the full amount as a retiring allowance notwithstanding that in the Settlement Agreement there was a non-solicitation clause and a clause in which he agreed not to make any "disparaging or critical remark" about his employer or its practices. Little, J. found that the two-fold test in Overin (that but for the loss of employment, the amount would not have been received, and the purpose of the payment was to compensate for loss of employment) was satisfied here.

Dunphy v. The Queen, 2010 DTC 1028 [at 2671], 2009 TCC 619 (Informal Procedure)

Sheridan, J. determined the portion of $45,000 payment received by the taxpayer on termination by his employer to be allocated to the taxpayer's human rights complaint by splitting the difference between the $17,277 amount claimed by the taxpayer and the $5,000 that the employer admitted it might be willing to pay in respect of that claim in correspondence with the CRA.

Rae v. The Queen, 2010 DTC 1107 [at 3044], 2010 TCC 130

[The taxpayer, a corporate controller, was suspended with pay after alleging that management was manipulating the Canadian corporation's financial records in order to maximize bonuses paid to management. The taxpayer took a new job at a different corporation. He brought a complaint to the Canadian corporation's UK controlling corporation. The UK corporation paid him a total of $160,000 for constructive dismissal (his contract provided for such payment if he were in fact dismissed), for an award under UK whistleblower protection legislation, and for the Canadian corporation having misrepresented its financial position during the previous negotiations leading up to his having been hired.

The Minister claimed that the entire $160,000 was received in respect of loss of employment because, but for the loss of employment, no payment would have been made. Boyle J. found that $45,000 of the amount was attributable to a lost bonus and other benefits and in respect of how his termination had been handled (and hence a retiring allowance), with the balance being non-taxable amounts in respect of his other claims.

Schewe v. The Queen, 2010 DTC 1056 [at 2810], 2010 TCC 47

At a time that the taxpayer was the dean of a program at a university, the university determined to also permit the taxpayer to become a full-time instructor at the university at a future date. The university terminated his employment, and the taxpayer was then awarded, in an action he brought against the university, nine months' salary and a sum of $90,000 in respect of the breach by the university of its agreement to have the taxpayer become an instructor.

The latter sum was not taxable to the taxpayer as it was not in respect of loss of employment of the taxpayer but was damages for the loss of the future position.

Wedge v. The Queen, 2005 DTC 1213, 2005 TCC 480

A payment made to the taxpayer by his employer upon his termination of employment by an affiliated corporation did not qualify as a retiring allowance given that it was paid as remuneration for services he had rendered to is employer.

Ahmad v. The Queen, 2002 DTC 2065 (TCC)

The taxpayer was wrongfully demoted and stripped of his significant responsibility by his employer at the instigation of a major customer (Ontario Hydro). Two years later, the taxpayer sued Ontario Hydro, and a year after that he was dismissed by his employer when he sued it as well.

Damages received by him from Ontario Hydro, which were characterized as being in respect of the tort of inducement of breach of his employment contract with his employer, were found not to be in respect of the ultimate loss of his job but, rather, in respect of the stripping of his responsibilities as a nuclear researcher, and therefore were not "in respect of" loss of employment, a phrase which suggested to Miller T.C.J. "a primary purpose test".

Miller T.C.J. also indicated that he did not view damages for construction dismissal as constituting a retiring allowance.

Fostey v. The Queen, 99 DTC 1004 (TCC)

The taxpayer was the chief executive officer of a corporation that sold its business to another corporation. In finding that a lump sum received by the taxpayer from the corporation qualified as a retiring allowance notwithstanding that he became an employee of the purchaser, Hamlyn TCJ. noted that the taxpayer was not a shareholder, director, or officer of the purchaser and that he performed clerical functions rather than executive functions at his new employer.

Anderson v. The Queen, 98 DTC 1190 (TCC)

The full amount of a lump sum received by the taxpayer in settlement of his action for alleged wrongful dismissal was a retiring allowance notwithstanding that a portion of the sum was calculated by reference to expenses he incurred in moving to a subsequent job, (so that, after being so reimbursed, he was not in any better economic position).

Blaker v. The Queen, 93 DTC 1025 (TCC)

A lump sum of $90,000 received by the taxpayer in consideration for his resignation from a governor-in-council appointment to the National Parole Board constituted a retiring allowance. Mogan J. stated (p. 1027) that he could "find nothing that would make an appointment by the Governor-in-Council different from an office or employment in any other sense"

Niles v. MNR, 91 DTC 806 (TCC)

The taxpayer, whose employment was terminated and who then received the sum of $5,000 from his employer following his filing of a formal complaint with the Ontario Human Rights Commission, received that amount as a retiring allowance. It did not "matter why he was laid off whether for breach of contract or because of an alleged discrimination. He received the amount to settle his claim against the employer for loss of employment"

Merrins v. MNR, 91 DTC 699 (TCC)

The taxpayer, who was laid off by his employer and filed a grievance under the collective agreement, received an award from the arbitrator as a retiring allowance.

Crighton v. MNR, 91 DTC 511 (TCC)

Upon terminating the taxpayer's employment, his employer offered to pay him the sum of $150,000 "in whatever form you choose which best suits your financial and tax requirements". After negotiation, it was agreed that $52,000 would be contributed to his RRSP, and the balance of $98,000 to an employee benefit plan established for his benefit. Watson D.J.TC held that although the outright acceptance of this offer by the taxpayer may very well have resulted in him being considered to have received a retiring allowance or a s. 56(2) benefit, no such entitlement to a retiring allowance occurred. Instead, the $98,000 was paid to a qualifying employee benefit plan.

Serafini v. MNR, 89 DTC 653 (TCC)

The regular salary package which the taxpayer received during the one-year period between the time that he ceased his duties of employment and the time specified in his retirement agreement as the time of his retirement, did not qualify as a "retiring allowance". Sarchuk J. stated:

"It is neither unusual nor infrequent that one can remain employed without actually working. Instances quickly come to mind such as sabbatical leave enjoyed by tenured university professors; leaves of absence, both with and without pay, for educational purposes; collective agreements permitting the utilization of excess sick leave as pre-retirement or vacation leave and so forth."

Harel v. Deputy Minister of Revenue (Quebec), 77 DTC 5438, [1977] CTC 441, [1978] 1 S.C.R. 851

A lump sum received on his retirement by the taxpayer in settlement of his accumulated sick-leave credit under the sickness benefit plan contained in the collective agreement, was received by him in respect of "long service" pursuant to s. 45 of the Income Tax Act (Quebec). An employee who remains at his post instead of being absent because of illness for 15 days a year is in fact giving longer service to his employer.

Administrative Policy

29 February 2012 External T.I. 2011-0431131E5 F - Sommes versées en règlement d'un grief

damages for event occurring during employment generally will be non-taxable

After a unionized employee filed a grievance for wrongful dismissal, the employer will pay the employee a lump sum so that the latter can make a contribution to a registered pension plan in order to buy back past years of service, as a result of which the employee can retire without penalty.

Before turning to the treatment of the contribution, CRA stated:

[G]eneral damages received by an employee to compensate the employee for events occurring during the employee’s employment will generally be considered unrelated to the loss of employment and therefore not to be taxable. Since such actions or events are distinct from the loss of employment, the damages are instead intended to compensate the employee for personal injury sustained before the loss of employment rather than to compensate the employee for the loss of employment.

Similarly, damages awarded as a result of a human rights violation may be considered unrelated to the loss of employment, although often loss of employment results from a complaint of human rights violation. An amount that a human rights tribunal awards to a taxpayer as general damages does not normally have to be included in income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) damages on retroactive reinstatement are taxable 69
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(j.1) - Subparagraph 60(j.1)(v) previous employment years of service included if bought back 139
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(j.1) - Subparagraph 60(j.1)(ii)(B) employer contributions vest for each year bought back by an employee 115

28 July 2017 External T.I. 2017-0685961E5 - Taxation of Settlement Amounts

settlement amount (re post-retirement benefits reduction) also paid to current employees likely not retiring allowance

A Settlement Amount was provided to current and former employees of the Employer to settle a grievance regarding the cancellation of various post-retirement benefits (PRBs) provided under a private health services plan and group term life insurance policy. The Settlement Agreement stated that the Settlement Amount was paid to them “in consideration of the loss of entitlement to PRBs, the alleged violation of their Charter rights and discontinuing litigation … as general damages for future loss of PRBs...” The Settlement Amount was generally calculated with reference to an employee’s pensionable years of service, up to a stipulated maximum, except that those with less than one year of such service were paid a flat amount.

CRA stated:

Since the Settlement Amount is being paid to both current … and former employees, it is unlikely that the Settlement Amount would be a retiring allowance. That is, the amount likely is not paid in recognition of the employees’ long service or in respect of loss of employment.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(3) - Paragraph 6(3)(b) settlement amounts paid after repudiation of post-retirement health benefits were deemed employment income 222
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) amounts received in settlement of employment grievances to be s. 5 income on general principles 203

21 July 2017 Internal T.I. 2017-0714931I7 F - Retiring allowance - Sick Leave

payout of accumulated (non-excess) sick leave credits on termination of employment was a retiring allowance

Under a collective agreement, an employee's sick leave credits (net of days used) are accumulated in a reserve ("Reserve") and, in December of each year, paid out in cash based on any excess over 20 days on September 30 of that year (with the balance carried forward). Would the payout of the balance in the Reserve (not exceeding 20 days and based on the current salary) on the employee's resignation, dismissal, or retirement qualify as a retiring allowance? CRA responded:

[T]he portion of the amount paid… in respect of the maximum…20 ,,, days sick leave in the Reserve at the time of retirement or in respect of the loss of employment may be considered a retiring allowance. However, the portion of the amount paid to the employee that is equivalent to the number of days of sick leave that exceeds twenty (20) days and would otherwise be paid to the employee during the month of December… is usually considered to be employment income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Death Benefit includes payout on death of accumulated (non-excess) sick leave credits 178
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) payout on termination of accumulated sick leave credit is employment income to extent otherwise would have been paid at year end 82

6 June 2016 Internal T.I. 2015-0590411I7 F - Revenu d’emploi ou allocation de retraite

“salary” paid after employment duties had ceased was retiring allowance
Situation 1

On Date 1, the taxpayer was informed by letter of her employer that her employment would terminate on Date 2 (being the end of the applicable notice period), but without any requirement to report for work after Date 1 unless requested. Until Date 2, she continued to receive her regular salary and to benefit under the group benefit plan (the "Plan"). Immediately following Date 2, the employer paid unpaid wages, accumulated vacation pay and severance pay, and thereafter submitted a Record of Employment to Service Canada.

Thereafter, in full satisfaction of any further of the taxpayer respecting her termination, the employer continued to pay her the equivalent of her salary net of applicable withholding taxes, until Date 3, and remained a member of the Plan. However, if she commenced other employment before Date 3, she would instead receive a lump sum.

Situation 2

An employer terminated an employee's participation in a registered pension plan ("RPP")

Situation 3

On Date 1, the taxpayer was informed (as confirmed by letter a few days later) that her services would no longer be required after Date 2). She received, in full satisfaction of her employer’s obligations towards her: "Compensation 1" paid in lieu of notice for the period from Date 2 to Date 3; "Compensation 2," representing severance pay, covering the period from Date 3 to Date 4; and her regular salary from Date 4 to Date 5. The taxpayer became eligible for pension benefits under the pension plan as of the second day following Date 3. Although contributions of the employer and taxpayer to the pension plan ceased as of Date 2, such contributions resumed between Date 4 and Date 5… and her years of service continued to accumulate during the same period.


Apparently in the context of retiring allowances being exempt from CPP/EI withholding, The Directorate was asked whether the amounts paid constituted employment income or a retiring allowance? The Directorate responded, respecting Situation 1:

[T]he employer terminated the employment of the taxpayer on Date 2… .

The remuneration that the taxpayer received between Date 1 and Date 2 was, therefore, … employment income… .

[T]he amount paid as compensation for cessation of employment on the day following Date 2…[and] the amounts calculated on the basis of the net salary paid between Date 2 and Date 3, and the final lump sum, if any, … were intended to compensate the taxpayer for the loss of employment and would not have received had it not been for the loss of employment. As a result, these amounts constitute a retiring allowance.

Respecting Situation 2:

The fact that the employer terminated the taxpayer's participation in the RPP is not sufficient…to consider that the employment terminated.

Respecting Situation 3:

Compensation 1 is employment income, as it is an amount paid in lieu of notice… . Compensation 2 constitutes a retiring allowance because, had it not been for the loss of employment, the taxpayer would not have received this compensation and the purpose of this payment was compensation for loss of her employment.

Furthermore, in spite of the fact that contributions of the taxpayer to the pension plans continued to accumulate for the period from Date 4 to Date 5, … the taxpayer and the employer did not have an employment relationship during that period…since [citing Schwartz] she was not required to provide services. …

Thus, since… there was no beginning of employment on Date 4… the amounts paid between Date 4 and Date 5 constituted the continued payment of a retiring allowance.

…[W]e do not understand how the taxpayer could resume pension accruals on Date 4 when there was no employment on Date 4.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) "salary" paid after notice period was retiring allowance 203

S2-F1-C2 - Retiring Allowances

Cessation of employment

2.7 ... The fact that an individual continues to participate in a health or dental plan of a former employer would not, on its own, indicate that the individual has not retired as it is relatively common for such plans to provide coverage to retirees. However, if the individual continues to accrue pension benefits, this would indicate a continued employment relationship as pension benefits only accrue to employees. The fact that an employer does not require an individual to report to work is not determinative... .

Loss of employment

2.8 A retiring allowance includes an amount received in respect of a loss of employment of an individual. In this context, the words in respect of have been held by the courts to imply a connection between the loss of employment and the subsequent receipt, where the primary purpose of the payment is to compensate for the loss of employment. Two questions set out by the courts to determine whether such a connection exists for purposes of a retiring allowance are as follows:

Question 1 – But for the loss of employment would the amount have been received?
Question 2 – Was the purpose of the payment to compensate a loss of employment?

Only if the answer to the first question is no and the answer to the second question is yes, will the amount received be considered a retiring allowance.

2.9 A loss of employment usually involves the elimination or expiration of particular employment. For example, a job or position might be abolished for economic reasons or as a consequence of the employer exiting a particular business. A loss of employment may also refer to the loss of an income source of an employee who is released from employment whether unilaterally or not. Since early retirement incentive plans are basically designed to eliminate a number of employment positions (even if it is on an elective basis), payments made upon such terminations are generally considered as being for a loss of employment.


2.12 ...[R]etirement or loss of employment does not include a termination of employment where arrangements have been made for the individual to obtain employment with an affiliate of the employer or to be re-hired by the employer. If there is no assurance or offer of new employment or re-employment at the time the individual terminates the employment, then the CRA will consider a retirement or loss of employment to have occurred, regardless of any subsequent events.

Harrassment or defamation damages

2.17 General damages relating to personal injuries sustained before or after a loss of employment, may be viewed as unrelated to the loss of employment and therefore are non-taxable. This would include, for example, damages for harassment during employment or damages for defamation after dismissal. In order to claim that damages received upon loss of employment are for personal injuries and unrelated to the loss of employment, it must be clearly demonstrated that the damages relate to events or actions separate from the loss of employment. In making such a determination, the amount of severance that the employee would reasonably be entitled to will be taken into consideration.

Human rights violations

2.18 Similarly, general damages relating to human rights violations can be considered unrelated to a loss of employment. This is despite the fact that the loss of employment is often a direct result of the human rights complaint. If a human rights tribunal awards an individual an amount for general damages, the amount is normally not required to be included in income. When a loss of employment involves a human rights violation and is settled out of court, a reasonable amount in respect of general damages can be excluded from income. ...

Payments in lieu

2.21 A payment in lieu of earnings for a period of reasonable notice of termination that is made under the explicit or implied terms of an individual’s employment is considered employment income. However, where a payment of damages arising from the loss of employment includes an amount in respect of the period of reasonable notice, this amount will be considered a retiring allowance.

27 January 2016 External T.I. 2015-0599581E5 - Taxation of a lump-sum from a former employer

employee received a retiring allowance under a “non-compete” if it compensated for a loss on an investment sale occurring because of his termination

An individual receives a lump-sum amount receivable from a former employer under a written agreement made following the termination of employment covenant, outlining (among other things) what could, and could not be done for a specified period thereafter. The lump-sum amount was calculated with reference to the former’s employee’s loss incurred on the disposition of an investment in [the employer?] CRA stated:

While amounts of this nature (e.g., non-competition payments) are generally deemed by paragraph 6(3)(b)… to be employment income…an amount received pursuant to a contractual obligation with a former employer may be treated as a retiring allowance in circumstances where the amount received can also reasonably be regarded as compensation for a loss of employment.

Thus, where it is established that your XXXXXXXXXX were only sold because of your termination of employment (i.e., you would not have sold your XXXXXXXXXX otherwise), the amount receivable (equal to your loss on the disposition of XXXXXXXXXX) under the non-competition agreement could be reasonably regarded as compensation for your loss of employment. In such a case, the amount when received would be included in income as a retiring allowance under subparagraph 56(1)(a)(ii)... .

7 August 2014 External T.I. 2014-0521901E5 - Damages in settlement of grievances

alleged discrimination

the employer abolished the employee's position, but the employee remained employed by the same employer and was assigned different duties. The union filed grievances in regards to the employee being assigned to new duties, alleging that the change in the employee's working conditions constituted illegal discrimination. The employee then retired and received a retirement allowance amount as well as a payment in settlement of his grievances. Was the settlement amount taxable?

In the course of general comments, CRA stated:

[T]he words "in respect of" [in s. 248(1) – "retiring allowance"] have been held… to imply a connection between the loss of employment and the subsequent receipt, where the primary purpose of the receipt was compensation for the loss of employment. Two questions set out by the Courts to determine whether a connection exists for purposes of a retiring allowance are as follows:

  1. But for the loss of employment would the amount have been received? and,
  2. Was the purpose of the payment to compensate a loss of employment?…

[W]here general damages are received in respect of personal injuries sustained before or after the loss of employment (for example, in situations of harassment during employment or defamation after dismissal), or where a loss of employment involves a human rights violation and is settled out of court, general damages may be viewed as unrelated to the loss of employment and therefore non-taxable.

30 April 2013 External T.I. 2013-0479461E5 F - Sommes versées dans le cadre d règlement à l'amiable

procedure for adjusting the allocation of amounts paid to a terminated employee

After noting that the surrogatum principle applied in determining the character of amounts paid to a former employee by the employer in an out-of-court settlement, CRA stated:

If the employer determines that it incorrectly included an amount on a slip, the employer must amend the previously issued slip by preparing an amended slip for the taxpayer. …

[I]f the taxpayer concerned has already filed his or her income tax return for the taxation year in question, the taxpayer … will then have to complete Form T1-ADJ, T1 Adjustment Request, duly completed or a signed letter that provides all the information concerning the taxpayer’s request to the taxpayer’s tax center.

If an employee disagrees with an amount on his or her slip …the employee may request an Employee Complaint Form from our Personal and Trust Tax Information Service at 1-800-959-7383. Once the employee has completed this form, they will return it to their tax center for processing.

21 March 2013 External T.I. 2012-0467221E5 - Retiring allowance converted to ELHT contribution

In response to a query as to made to employees. an employer must withhold income tax from a lump sum pre-retirement leave payment ("LPLP") made to a retiring employee if the employee directs a portion or all of the LPLP to an employee life and health trust ("ELHT"), CRA stated:

the LPLP is received on retirement and relates to an employee's long service with the employer and sick leave credits. As such, the LPLP would be considered a retiring allowance and subject to income tax withholding.

1998 Revenue Canada Paper 9824890

Comprehensive discussion of issues arising out of termination of employment.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) 10

1997 Ruling 970913

Damages to be received by a resigning employee in respect of her sexual harassment claim and in respect of a claim for malicious prosecution, malicious investigation, breach of statutory duty, abuse of power, intentional infliction of mental suffering, defamation, injury to reputation, breach of fiduciary duty, negligence, and as reimbursement of legal expenses not incurred in respect of the settlement of the retiring allowance portion of amounts paid to her, would be exempt receipts.

8 October 1996 T.I. 962701 (C.T.O. "Loss of Employment, Mental Distress, Damages")

"Generally ... payments made by an employer to an employee in connection with the loss or termination of employment, whether or not received as damages or pursuant to an order of a competent tribunal, are characterized as a retiring allowance... . To the extent that damages which are awarded by a Human Rights Tribunal, or on a settlement in lieu thereof, do not relate to the loss of employment but relate solely to damages arising from a human rights violation, such damages are not required to be included in income. The reimbursement of legal costs do not form part of a retiring allowance but such amounts are taxable under paragraph 56(1)(l.1)...".

Income Tax Technical News, No. 7, 21 February 1996 (cancelled)

Where an individual retires from all employment on the sale of the employer's active business but agrees to carry on certain administrative duties for the employer for which no remuneration or director's fees will be received, the individual may still be considered to have retired or to have lost the employment.

Where no assurance or offer of new employment with an affiliate has been given at the time an individual ceases employment, there will be considered to be a loss of employment.

Where the employer's pension plan recognizes any part of the service with a former related employer, then all the years of service with the former employer can be included in the total number of years for purposes of calculating the eligible amount of the retiring allowance.

3 August 1995 Memorandum 952001 (C.T.O. "Retiring Allowance and Return to Same Employer")

"If a person is terminated and receives a termination payment, without any assurance of being rehired, it is our position that the payment can be a retiring allowance. If the person is subsequently rehired, the nature of the payment will not change. On the other hand, where the person is given assurance before termination of being rehired, and is subsequently rehired, we do not consider a loss of employment to have occurred"

4 July 1995 External T.I. 5-951675 -

Where an individual was terminated from full-time employment and, at the same time, was rehired on a part-time basis for a three-year period, a payment made to the individual at the time of such termination would not qualify as a retiring allowance.

15 June 1995 T.I. 950837 (C.T.O. "Fringe Benefits and Retiring Allowance")

"The amount paid by the employer on the employee's behalf for the maintenance of health benefits is not considered a retiring allowance for the purposes of the Act... . However, it is our general position that where an employer extends to former employees, those benefits which are otherwise non-taxable to current employees by virtue of subparagraph 6(1)(a)(i) of the Act, the benefits so described will also not be taxable to the former employees (provided the benefit arises by virtue of the former employment)"

3 April 1995 External T.I. 5-950327 -

9 February 1995 Memorandum 941852 (C.T.O. "Damages for Employment and Related Human Right Violation")

Where the taxpayer has resigned voluntarily and the remedy sought by her in her complaint was the loss of salary attributable to her former employer's failure to reclassify or promote her, the related settlement amount received by her would be considered remuneration rather than a retiring allowance.

General damages received for loss of self-respect, mental anguish, humiliation or hurt feelings would not form part of a retiring allowance and would be received free of tax. The portion of the settlement allocated to such amounts would be required to be reasonable.

1 November 1994 External T.I. 5-942603 -

"Continued participation in a former employer's health plan (i.e.,drug, dental, long term disability plan) for a restricted period of time would not, in itself, indicate that employment has not been terminated, particularly when the employer's plan specifically permits former employees to be covered under the plan"

11 October 1994 Memorandum 941816 (C.T.O. "Ex Gratia Payment")

An Ex gratia payment authorized by a Order in Council in connection with a wrongful dismissal grievance will be taxable either as employment income or a retiring allowance.

13 September 1994 External T.I. 5-941977 -

A retiring allowance cannot be paid on the downgrading of an employment position.

28 June 1994 External T.I. 5-941324 -

Where a retiring allowance is to be paid in installments, any amount calculated as interest on the installments will characterized as interest and will not be transferable to an RRSP under s. 60(j.1). The installments will be taxable in the year of receipt.

24 June 1994 T.I. Memorandum 941610 (C.T.O. "Workforce Reduction Payment")

"If the parties agreed during negotiations before or after termination that the employee is entitled to a certain notice period, then a payment in lieu of such notice is employment income since the employee's right to it was an implicit term of the employment contract." As stated in IT-196R2, s. 6(3) applies to such a payment.

22 June 1994 External T.I. 5-941274 -

"The Department has taken the position that a payment in lieu of earnings for the period of reasonable notice which is made by virtue of the terms of an employment contract (whether explicit or implied) will be treated as employment income and not as a retiring allowance ... . With respect to the continuation of benefits in situation of loss of an employment, the Department has taken the position that in a case where pension benefits continued to accrue or normal employee benefits continued to be enjoyed by an individual, it is unlikely that employment has ceased even though the individual is not required to report to work."

12 May 1994 Institute of Chartered Accountants of Alberta Round Table, Q. 12, File No. 940969 (C.T.O. "Retiring Allowance Pay in Lieu of Notice")

A payment made in lieu of earnings for the period for which reasonable notice is required by virtue of the terms of an employment contract (whether implied or explicit) or by statute will be treated as employment income and not as a retiring allowance.

1 March 1994 T.I. 94022 (C.T.O. "H.A.A. 7278-1 Retiring Allowance Return to Employment")

Where an individual is rehired (on a casual, part-time or contract basis) by a former employer or an affiliated employer, shortly after leaving an office or employment, the individual will be considered not to have retired or suffered a loss of employment or office. However, where she has retired (or has been terminated) without any assurance at that time of being rehired by the former employer, and receives from the former employer a payment based on long service (or for loss of employment or office), the payment will qualify as a retiring allowance even if the parties have an understanding that the individual might be rehired at a later time when circumstances have changed. If an individual is engaged shortly after leaving her employment to perform services as an independent contractor, a factual determination must be made.

8 March 1994 External T.I. 5-940008 -

Termination pay received pursuant to s. 57 of the Employment Standards Act (Ontario) does not constitute a retiring allowance whether or not received in a lump-sum amount, whereas severance pay received pursuant to s. 58 of that Act qualifies as a retiring allowance.

17 February 1994 External T.I. 5-940052 -

A person is not considered to have retired or lost an office or employment if pensionable service under a registered pension plan continues to accrue. Accordingly, amounts paid before pensionable service credits are discontinued cannot be treated as retiring allowances.

8 February 1994 Memorandum 933720 (H.A.A. 4749-3) (C.T.O. "Retiring Allowance on Transfer within School")

Head Office generally was of the view that an employee who transfers from a staff support position to a teaching position with the same school board has not retired or suffered a loss of employment. However, if funds associated with pension benefits that accrued to the employee must be transferred to a new pension provision or plan or the pension benefits have been commuted, this might be evidence that a loss of employment had occurred.

93 C.R. - Q. 34

Termination pay in lieu of notice received under s. 57 of the Employment Standards Act (Ontario) will not be a retiring allowance whether or not received in a lump-sum amount, whereas severance pay received pursuant to s. 58 of that Act will qualify as a retiring allowance.

Where a taxpayer sues for wrongful dismissal, a court award or a negotiated settlement has resulted in the receipt of an amount based on the common law rights of the taxpayer, and no mention is made that the taxpayer is to be reinstated, the amount probably will be a retiring allowance.

7 December 1993 External T.I. 5-933397 -

It is a question of fact whether a payment of interest in respect of a severance payment is a retiring allowance or interest for purposes of the Act.

19 November 1993 External T.I. 5-932508 -

It is a question of fact whether the degree of involvement by an individual in a corporation following the sale of all his shares will be sufficient to conclude that an allowance paid to him on the sale was not a retiring allowance.

5 July 1993 Memorandum (Tax Window, No. 33, p. 8, ¶2643)

Under paragraph 30(c) of the Canada Labour Standards Regulations, an employee is considered to have been laid off where she was advised that the period of the lay-off would not exceed six months and she was recalled to work within that period. She would not be considered to have her employment terminated unless her laid-off status exceeded the six-month period.

A payment which is described both within the definition of a retiring allowance and under s. 6(3) will be considered to be the former.

10 June 1993 Memorandum (Tax Window, No. 32, p. 4, ¶2594)

Where in an out-of-court settlement of a suit brought in connection with the termination of employment, an amount is allocated as damages for violation of human rights, it must be established that human rights issues were involved and that the payment was reasonable compared to awards ordered by actual tribunals, in order for such amount not to be considered a retiring allowance.

4 June 1993 Memorandum (Tax Window, No. 32, p. 9, ¶2602)

Where an employee is dismissed, receives an arbitration award and is reinstated in his former position, then if the reinstatement is on a retroactive basis the amounts received in settlement of foregone salary will be included in his employment income even if he did not return to his former employer.

17 May 1993 Memorandum (Tax Window, No. 31, p. 1, ¶2507)

Where a long-term unionized employee has been laid off by his employer or has retired without any assurance of being rehired, an amount received under the collective agreement as a result of the lay-off [or retirement] will be a retiring allowance where the employee dealt at arm's length with his employer and received the amount in respect of a loss of office in recognition of long service. The payment would not be considered to be a retiring allowance if the employee were rehired by his employer or an affiliate shortly after the lay-off, and this was foreseeable at the time of the lay-off.

28 April 1993 Memorandum 931202 (C.T.O. "Employment Standards Act (Ontario) (ESA) Retiring Allowances")

Termination pay received pursuant to s. 57 of the Employment Standards Act (Ontario) will be considered to be employment income rather than a retiring allowance whether received directly from the employer or through the Employment Standards Branch.

9 March 1993 T.I. (Tax Window, no. 29, p. 21, ¶2458)

A payment received by a union from an employer who closed one of its operations as compensation for the loss of exclusive bargaining rights, the surrender of one of its bargaining units and the loss of jurisdiction over that unit would be included in the hands of union members when paid to them by the union.

12 January 1993 T.I. (Tax Window, No. 20, p. 16, ¶2385)

When an employee ceases work due to retirement but pension benefits continue to accrue or normal employee benefits continue to be enjoyed by the individual, it is unlikely that employment has ceased, with the result that amounts received during this period would not be considered to be retiring allowances.

12 November 1992, T.I. 911850 (September 1993 Access Letter, p. 413, ¶C56-251)

General damages awarded by a human rights tribunal would not constitute a retiring allowance.

12 August 1992 External T.I. 5-921978 -

For purposes of the position that an employee will not have retired if employment continues with an affiliate of the former employer, RC will consider two companies to be affiliated if one is effectively controlled by the other by virtue of any combination of exercisable stock options and economic influence, or if they have an interdependent working relationship which inter alia permits the exchange of employment opportunities. An entity which is one-third owned by three different entities will be considered to be affiliated with each entity.

8 April 1992 T.I. (Tax Window, No. 18, p. 19, ¶1844)

A payment made to an employee upon being promoted to partner is not necessarily a retiring allowance.

5 February 1992 Internal T.I. 7-920092 -

Where an employee dies and the balance of accumulated sick leave credits in respect of the employee continue to be paid to his beneficiaries, such payments would constitute retiring allowances in their hands, and not death benefits.

5 February 1992 T.I. (January - February 1993 Access Letter, p 36, ¶C248-123)

It is unlikely that employment has ceased where pension benefits continue to accrue or normal employee benefits continue to be enjoyed by the individual, even though he is not required to report to work. Amounts received by the individual during this period would not be considered to be retiring allowances.

22 January 1992 T.I. (Tax Window, No. 15, p. 5, ¶1707)

A payment will not be considered to be a retiring allowance when, at the time the employee ceases employment, there is assurance that he will be re-employed by an affiliate, defined here as any company that is related, associated with, or that does not deal at arm's length with, the former employer.

10 June 1991 Memorandum (Tax Window, No. 4, p. 27, ¶1287)

An amount received as damages on the withdrawal of an offer of employment may come within the definition if the "withdrawal" is in fact the termination of an employment contract.

90 C.R. - Q4

Where an individual entitled to a retiring allowance dies, the amount received by the estate as a consequence of his death is a death benefit.

23 April 1990 T.I. (September 1990 Access Letter, ¶1436)

Where an individual is a majority shareholder and employee of both A Ltd. and B Ltd., a payment made to him upon his retirement from A Ltd. while he continues to work for B Ltd. will not qualify.

18 October 89 T.I. (March 1990 Access Letter, ¶1156)

Pre-judgment interest received in a court award would be excluded from income, and therefore withholding tax is not required to be deducted on the payment of such amount.

89 C.R. - Q.50

RC does not consider an employee to have retired where he continues employment with any person who acquired or continues the business carried on by the employee's former employer (in the case of the question, by the parent company). Where the employee subsequently receives a retiring allowance on his retirement from the parent company, the years of employment with the subsidiary company will be included in determining the allowable rollover under s. 60(j.1).

86 C.R. - Q.52

a payment made by a partnership to a retired partner may qualify as a retiring allowance provided that the amount is paid in recognition of the taxpayer's long service as an employee.

84 C.R. - Q.20

it is essentially a determination of fact whether a series of payments represents pension benefits under s. 56(1)(a)(i) or retiring allowance under s. 56(1)(a)(ii).

84 C.R. - Q.23

loss of office does not include a transfer (or demotion) from one position to another with the same employer.

IT-337R2 "Retiring Allowances"


Brown, "Revisiting the Tax Treatment of Settlement Amounts: Recent Developments", Taxation of Executive Compensation and Retirement, Vol. 8, No. 6, February 1997, p. 243.

Collins, "The Terminated Employee: Minimizing the Tax Bite", 1993 Conference Report, C. 31.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(j.1) 0

Brown, Lee, "Putting Employees on Notice: Tax Treatment of Amounts Paid on Termination of Employment", Taxation of Executive Compensation and Retirement, April 1994, p. 908.

Laushway, "Retiring Allowances and Future Employment by Affiliates", Canadian Current Tax, July, 1993, p. P15.

Novek, "Retiring Allowances are Subject to Administrative Guidelines", Taxation of Executive Compensation and Retirementt, November 1991, p. 523.

MacKnight, "Termination Payments for Mental Distress and Loss of Reputation", Canadian Current Tax, October 1993, p. P21.