Registered Plans Division Financial Industries Division Ms Stella Kotlar, Director
Attention: Hilde Sorensen
Eligible Period of Temporary Absence
This is in reply to your memorandum of June 25, 1993, in which you describe a situation where an employee no longer performs any services for an employer for a period of time which will conclude in retirement. During this period the employee may or may not be paid. You ask for an interpretation of the words "temporary" and "absence" in the context of the definition of "eligible period of temporary absence" contained in subsection 8500(1) of the Income Tax Act Regulations (the "Regulations"). Your query is whether a member can be on a "temporary absence" if it is understood by all that the member will be retiring wihtout providing any further services to the employer.
The relevant portion of the definition in subsection 8500(1) of the Regulations is as follows:
"eligible period of temporary absence" of an individual with respect to an employer means a period throughout which the individual does not render services to the employer by reason of leave of absence, layoff, strike, lock-out or any other circumstance acceptable to the Minister".
The word "temporary" is defined in Black's Law Dictionary (6th Edition) as:
That which is to last for a limited time only, as distinguished from that which is perpetual, or indefinite, in its duration. Opposite of permanent.
The definition of "temporary" in the Concise Oxford Dictionary (8th Edition) is "lasting or meant to last only for a limited time".
In the circumstances described by you there is no question that the period is a temporary one. It lasts for a specified time and ends on retirement. The only issue is whether the period is one of "absence" from employment.
"Absence" is defined in the Oxford as "the state of being away from a place or person; the time or duration of being away".
Before discussing whether the leave described by you is an "absence" from employment, we wish to review the provisions relating to eligible service.
One of the conditions for registration of a pension plan is that lifetime retirement benefits be associated with eligible service. The most common form of eligible service as described in paragraph 8503(3)(a) of the Regulations is paid employment in Canada. Other forms of eligible service include periods of temporary absence, of disability, and of employment with predecessor employers or with former employers under other plans. The receipt of remuneration is a common theme for all forms of eligible service except those of temporary absence and disability. Furthermore, the definition of "eligible period of temporary absence" does not include a requirement that remuneration be received. Periods of temporary absence and disability are, therefore, exceptions to the usual rule and have been warranted acceptable periods of time for which pension benefits may accrue.
The Explanatory Notes provide only the following comment to suggest the purpose for the exception provided for an "eligible period of temporary absence" - "Subparagraph 8503(3)(a)(iii) permits benefits to be provided under a defined benefit provision of an RPP in respect of an eligible period of temporary absence as if it were a period of paid employment" (emphasis added).
Under the definition there is a requirement of a continued employment relationship (reference to "the employer") and that services are not rendered because of certain circumstances. The circumstances listed - leave of absence, layoff, strike, lock-out - evidence situations where the provision of services is interrupted, whether by unilateral (layoff, strike, lock-out) or bilateral action (leave of absence).
In the situation described by you, it is necessary to determine if there is a continued employment relationship. If the period during which the member is not rendering services still constitutes a period of employment, whether or not remuneration is received, then in our view it can constitute a period of temporary absence even though the member retires at the end of that period. There is no need for the member to return to employment for one or more days prior to retirement in order for the period to be considered an "absence" from that employment. (Please note that it is possible that, if remuneration is received, it could also be considered a period of paid employment and qualify as eligible service under subparagraph 8503(3)(a)(i) of the Regulations.)
In Serafini v. MNR (89 DTC 653), the Tax Court of Canada made the following observation (at 657):
...it is quite possible for a person to be an employee without actually working. The fact that Mr. Serafini was no longer required to report for work and was no longer required to perform any duties is not per se determinative of the issue. If his situation requires characterization it can be likened to a pre- retirement leave with full pay and benefits. An attempt by (the employer) to deprive him of any employee benefits during that period would have, in my view, entitled him to sue for breach of his employment contract. 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; leave 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.
In our view the examples of non-working employment periods cited by the Court would also qualify as eligible periods of temporary absence, whether taken immediately before retirement or at other times during the employment relationship.
We have reviewed the commentary in your Registered Pension Plan Defined Benefit Technical Manual (the "Manual") under the definition in subsection 8500(1). The types of leave which are listed in paragraph 8(e) of Information Circular 72-13R8 are stated to be acceptable and we agree with this position subject to our earlier comment that a paid leave of absence may also qualify under subparagraph 8503(3)(a)(i) of the Regulations. We also noted the commentary at 8.3.3 of the Manual on early retirement (10th paragraph) which refers to the Explanatory Notes discussion about special early retirement arrangements which make use of the temporary absence rules to permit individuals to phase in their retirement. The last sentence of that commentary is as follows: "It is a question of fact whether the individual is on a leave of absence or has terminated employment." This is the crucial issue in the situation described by you. A temporary absence may terminate in retirement, disability, death or under other circumstances and still be considered a temporary absence from the employment. There is no requirement that the absence conclude by the member returning to employment so long as the absence coincides with a period of employment.
We trust the foregoing comments will assist.
for DirectorFinancial Industries DivisionRulings Directorate