| 19(1) | File No. 5-9751 |
| W.C. Harding | |
| (613) 957-8953 |
April 6, 1990
Dear Sir:
This is in reply to your letter of February 1, 1990 which was referred to us on March 14, 1940 by the Taxpayer Assistance Section of our London District Office.
In your letter you advise that, 24(1) On the basis of this advice, you have then requested our opinion as to whether or not a portion of the payment may be treated as a retiring allowance, whether certain legal fees incurred will be deductible in computing income and whether the interest element will be treated as interest for tax purposes.
Since your letter relates to a proposed transaction, we cannot provide any specific opinions in respect to it except in response to a request for an advance income tax ruling. Such a request entails the provision of all related documents for our review as well as an identification of all of the specific provisions of the Income Tax Act (the "Act") in respect of which the request is to be considered. A ruling request must also contain a statement as to whether any of the issues involved are to the best of a taxpayer's knowledge being considered by a District Office and/or Taxation Centre in connection with a tax return already filed, or if any of the issues are under objection.
The procedures are discussed in our Information Circular IC-70-6R, a copy of which is attached for your reference. Please note that the hourly rate for rulings is now $65, the required deposit is $325, and there is no longer a minimum charge.
While we cannot, at this time, provide a ruling, we can offer the following comments.
a. An amount received from an employer after "retirement" is taxable either as employment income by virtue of subsection 6(3) of the Income Tax Act (the Act) or as a retiring allowance by virtue of subparagraph 56(1)(a)(ii) of the Act. If the amount is in satisfaction of an obligation by the employer to the employee arising as a result of his employment, the amount is usually considered employment income unless it can be considered a retiring allowance. In any particular case the nature of a payment will be a question of fact determinable only after an examination of all relevant factors.
b. When a payment is determined to be a retiring allowance, the amount transferable to an RRSP may, among other factors, be based on the years of service in a business which was acquired or continued by an employer. Again an exact determination may only be made on the basis of an analysis of all relevant facts.
c. Legal fees incurred by an employee to collect salary are deductible in the calculation of employment income, however any reimbursements of such expenses by the former employer would be included as additional employment income. Unreimbursed legal fees incurred by an employee to establish a right to, or collect, a retiring allowance may be deducted as noted on page 22 of the 1989 General Tax Guide.
d. A retiring allowance may be paid over a period of time and be taxable at the time of receipt. Generally, taxation of an accrued salary may also be deferred until it is paid provided the deferral is not part of a salary deferral arrangement which has as one of its main purposes the deferral of taxes otherwise payable.
e. Pre-judgement interest related to unpaid salary and all post-judgement interest is reportable as interest income for tax purposes. Pre-judgement interest is not, however, otherwise included in income.
We hope our comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate