Principal Issues: How is a payment of a retiring allowance treated for tax purposes.
Position: It is a question of fact whether a payment is a retiring allowance. Discussed the tax implications of a retiring allowance.
Reasons: Provisions of the ITA
Signed on April 20, 2004
XXXXXXXXXX
Dear XXXXXXXXXX:
The Honourable Stan Keyes, Minister of National Revenue, has asked me to reply to your letter of February 22, 2004, concerning the payment of a retiring allowance and the withholding of tax required on that payment.
It is a question of fact whether a payment made by an employer to an employee or former employee is income from employment or a retiring allowance. As discussed in paragraph two of the attached Interpretation Bulletin IT-337R4, Retiring Allowances, a retiring allowance means an amount received by a taxpayer:
(a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service, or
(b) in respect of a loss of 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.
A retiring allowance received by a taxpayer is included in income under subparagraph 56(1)(a)(ii) of the Income Tax Act. However, paragraph 60(j.1) of the Act provides for a deduction from income for the eligible portion of a retiring allowance that has been included in the taxpayer's income and transferred to a registered retirement savings plan (RRSP) under which the taxpayer is the annuitant.
An employer paying a retiring allowance to a taxpayer is required to withhold tax from the payment as prescribed in the Income Tax Regulations. However, there are certain exclusions from these requirements and no tax is required to be withheld on the eligible portion of the retiring allowance that is transferred directly to the taxpayer's RRSP.
When a retiring allowance is paid to a taxpayer, there are no Canada Pension Plan or Employment Insurance contributions required on this amount.
I trust that my comments will be of assistance to you.
Yours sincerely,
Stephen Rigby Assistant Commissioner Policy and Planning Branch
Attachment
Mary Pat Baldwin
2004-006458
823-2631
March 8, 2004