Principal Issues: What are the tax implications of paying a retiring allowance to a terminated employee in the calendar year following the year of termination at the employee's election.
Position: Provided that both parties agreed to the deferral prior to the termination of employment, the amount will be taxable in the year received.
Reasons: A retiring allowance is included in income under subparagraph 56(1)(a)(ii) for the year of receipt.
XXXXXXXXXX 2019-083224 K. Podor April 7, 2020
Dear XXXXXXXXXX:
Re: Deferral of lump sum retiring allowance
This is in reply to your email enquiry dated November 12, 2019 in which you asked us to clarify the tax implications of paying a retiring allowance to a terminated employee in the calendar year following the year of termination at the election of the employee.
Our comments
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.
Income Tax Folio S2-F1-C2, Retiring Allowances provides the CRA’s general views on the taxation of retiring allowances. Paragraph 2.26 states:
In some cases, employers offer employees the choice of receiving a retiring allowance as a lump sum at the time of termination or in instalments over a number of years. If an individual chooses the instalment option on or before the employment is terminated, the instalments are taxable in the year received.
This position applies equally where payment of the lump sum is deferred to a subsequent year, provided that the individual chooses the deferred option on or before termination of employment.
We trust these comments will be of assistance.
Yours truly,
Dave Wurtele
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch