Dear Sirs:
Re: Retiring Allowance
This is in reply to your letter dated January 29, 1991 in which you requested our technical interpretation regarding the definition of "retiring allowance" in subsection 248(1) and the application of subparagraph 56(1)(a)(ii) and section 6 of the Income Tax Act (the "Act") to the following situation
ISSUE
More specifically you have asked:
(1) whether the equivalent of three months salary at the date of termination of employment representing pay in lieu of notice and the equivalent of one half month's salary or wages at the date of termination of employment for each full year of service, pro-rated and diminished by any amounts received in respect of severance and/or termination payments under any applicable statutes, would qualify as a retiring allowance as the term is defined in subsection 248(1) of the Act;
(2) whether our response to (1) would change if the employee chooses periodic payments rather than a lump sum payment;
(3) whether our response to (1) would change if the employment termination were voluntary, and;
(4) whether our response to (1) would change if the amounts were paid pursuant to either the employment contracts or under relevant employment standards legislation.
Your Views
It is your view that both payments mentioned in (1) above constitute a retiring allowance as that term is defined in subsection 248(1) of the Act and that whether the amounts are paid on a periodic or lump sum basis would not change that view.
Our Comments
It is a question of fact as to whether or not any particular payment will qualify as a retiring allowance as defined in subsection 248(1) of the Act and such a determination can only be made after a complete review of all relevant information and documentation. Based on the information provided we are unable to provide you with a definitive response as to the nature of the payments described; however, we are prepared to provide the following general comments.
As explained in Interpretation Bulletin It-337R2, a retiring allowance must be received upon or after retirement in respect of long service or be paid in respect of a loss of employment. If the payment meets either of those two conditions and otherwise qualifies, the payment will be regarded as a retiring allowance. The terms of the employment contract will determine whether the payments are in the nature of a retiring allowance. The terms of the employment contract will determine whether the payments are in the nature of a retiring allowance or merely a continuation of the employee's salary from employment. It is our view that there an employee continues to receive a salary and that pension and/or other benefits has ceased. Such payments of salary would be considered remuneration from employment rather than a retiring allowance unless the employment benefits in question are of no significance to the employee.
Once an amount has been established to be a retiring allowance, it may be paid over any period of time and is included in computing the retiree's income as it is received.
As mentioned in paragraph 6 of Interpretation Bulletin IT-337R2, payments made with respect to voluntary termination may also qualify as a retiring allowance.
We trust our comments will be of assistance to you.
for DirectorGeneral and Business DivisionRulings Directorate