Principal Issues: [TaxInterpretations translation] What is the nature of certain amounts received in respect of loss of employment?
Position: Some amounts are retiring allowances, others are employment income.
Reasons: Question of fact and definition of retiring allowance
August 24, 2000
Revenue Collections Directorate Headquarters Trust Accounts Division Income Tax Rulings Directorate Tax Policy and Technical Services Section Michel Lambert Attention: Mr. Marc Normand (613) 957-8953
2000-003411
Retiring Allowance and Income
Voluntary Severance Program
This is further to your memo received on June 29, 2000. You wish to know whether amounts paid by XXXXXXXXXX to XXXXXXXXXX constitute retiring allowances or employment income.
THE FACTS
1. XXXXXXXXXX signed an agreement concerning the latter's voluntary departure.
2. The agreement provided that XXXXXXXXXX's employment was to end on XXXXXXXXXX.
3. During the XXXXXXXXXX period (the interim period), XXXXXXXXXX was not required to report to work and was not entitled to any regular pay. She was, however, entitled to certain benefits including disability insurance, and under a dental plan and medical plan.
4. During the first XXXXXXXXXX months of the interim period, XXXXXXXXXX was required to pay the employee's contributions to the XXXXXXXXXX pension plan. For the remainder of the interim period, she could continue to accumulate pensionable service but was required to pay both employer and employee contributions.
As part of the agreement, XXXXXXXXXX accepted a lump sum payment of $XXXXXXXXXXX under the XXXXXXXXXX voluntary severance program. This amount was paid to her in XXXXXXXXXX instalments, i.e., XXXXXXXXXX. The agreement between the parties indicated that the first XXXXXXXXXX amounts were considered employment income and were subject to the usual deductions at source.
YOUR QUESTION
You wish to know whether the amounts paid constitute employment income or a retiring allowance.
OUR OPINION
Subsection 248(1) of the Income Tax Act (the “Act”) defines the term retiring allowance as “an amount...received ... 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 judgment of a competent tribunal, by the taxpayer… .”
Paragraph 7 of Interpretation Bulletin IT-337R3 states that payments for accrued vacation pay and payments in lieu of earnings for the period of a reasonable notice of termination by virtue of the terms of the taxpayer's employment do not constitute retiring allowances.
Thus, an amount received to induce an employee to leave an employer will generally be considered a retiring allowance. However, as stated in Income Tax Technical News No. 19, which we published on June 19, 2000, in determining how to treat such amounts, we will generally avoid recognizing them as a retiring allowance if the employer treats them as employment income for purposes of calculating employment insurance contributions and benefits, accrued pension credits for the Canada Pension Plan or eligible years of service under a registered pension plan. The employer should treat the payment in the same way for the different laws we administer.
Based on the facts provided by you, the XXXXXXXXXX amounts were considered employment income by the parties and were subject to the usual source deductions. Consequently, we are of the view that these XXXXXXXXXX amounts constituted employment income, as stipulated in the agreement between the parties. Those amounts must be taxed as employment income under subsection 5(1).
As for the amount of $XXXXXXXXXX, we are of the view that it was paid in respect of XXXXXXXXXX's loss of employment with XXXXXXXXXX and therefore qualified as a retiring allowance. This amount must be taxed under paragraph 56(1)(a)(ii) and may give rise to a deduction under paragraph 60(j.1) if XXXXXXXXXX transfers this amount or a portion thereof to a registered retirement savings plan.
ACCESS TO INFORMATION
For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the Legislative Access Bank version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
We hope that these comments are of assistance.
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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