Principal Issues: Will the payment of an early retirement benefit offered by an employer to its employees be considered a retiring allowance for purposes of subsection 248(1) of the Income Tax Act?
Position: Question of fact, only general comments provided
Reasons: wording of the legislation
2006-020279 XXXXXXXXXX Kimberly Duval, CA (613) 599-6054 October 11, 2006
Dear XXXXXXXXXX:
Re: Technical Interpretation - Retiring Allowance
This is in response to your letter of August 25, 2006 requesting our comments as to whether an early retirement benefit paid by an employer to its employees would be considered a retiring allowance in accordance with subsection 248(1) of the Income Tax Act (the "Act"). You state in your letter that, based on a certain age and service requirement of the employee, he or she would be entitled to receive either a lump sum payment or a series of payments from the employer until the employee reaches age 65. The early retirement benefit is funded by the employer from its annual general revenues and it is, in no way, connected to the employer's registered pension plan.
The situation outlined in your letter appears to be a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
A retiring allowance is defined in subsection 248(1) of the Act to mean an amount (other than a superannuation or pension benefit, an amount received as a consequence of the death of an employee or a benefit described in subparagraph 6(1)(a)(iv)) received by a taxpayer on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service or 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 judgement of a competent tribunal. The Canada Revenue Agency's (the "CRA") general views regarding retiring allowances are set out in Interpretation Bulletin IT-337R4, "Retiring Allowance", a copy of which can be obtained on our website.
As discussed in our telephone conversation of October 4, 2006 (Duval/XXXXXXXXXX), whether or not an amount received by an employee, upon or after retirement, is salary, wages or other remuneration, included in income pursuant to subsection 5(1) of the Act, or a retiring allowance that is included in income pursuant to subparagraph 56(1)(a)(ii) of the Act, is a question of fact. The determination as to whether an amount would be considered a retiring allowance can only be made after a thorough review of all of the details relevant to the particular situation, including the employment contract and any other agreements giving rise to the payment.
Paragraph 17 of IT-337R4 refers to situations where employees have the option of receiving an amount either as a lump sum at the time of termination or in instalments over a number of years under programs designed to encourage voluntary retirements. As noted in that paragraph, if the employee chooses the instalment option on or before the employment is terminated, the instalments will be taxable in the year received. This election to choose the instalment option must be made on or before the termination of employment, that is, before an employee is legally entitled to demand payment of the termination amount and the employer is obligated to pay this amount.
Paragraphs 4 and 8 of IT-337R4 discuss the question as to whether or not an individual has in fact "retired" from an office or employment. Again, as noted above, the determination as to whether an individual has retired can only be made after a thorough review of all the facts in the particular circumstances.
We trust our comments will be of assistance to you.
Yours truly,
Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch