5-912077
Dear 19(1)
This is to confirm the comments made to you during our 19(1) Delorey) telephone conversation on July 31, 1991 concerning the taxation of severance pay received upon retirement from employment.
Severance pay received upon retirement from employment is considered to be a retiring allowance for the purposes of the Income Tax Act (the "Act") and thus qualifies for "rollover" to a registered retirement savings plan ("RRSP") to the extent provided under paragraph 60(j.1) of the Act. This rollover provision is briefly discussed in paragraphs 12 and 13 of Interpretation Bulletin IT-337R2 (copy enclosed) and on page 27 of the 1990 PENSION and RRSP TAX GUIDE (copy enclosed).
Pursuant to clause 60(j.1)(ii)(A) of the Act, a retiree may transfer $2,000 of his retiring allowance to an RRSP for each year he was employed by the employer paying the retiring allowance (the "Employer") or a person related to the Employer. Where the retiree was not a member of a pension plan, or the Employer's or related employer's contributions to a pension plan did not vest in the retiree at the time the retiring allowance is paid, the retiree may transfer under clause 60(j.1)(ii)(B) of the Act an additional $1,500 of his retiring allowance to an RRSP for each such year that was before 1989. As stated in paragraph 13(a) of the enclosed IT-337R2, a part year counts as one year for these purposes.
By virtue of subparagraph 60(j.1)(iv) of the Act, a previous employer of the retiree whose service therewith is recognized in determining the retiree's pension benefits is included as a person related to the Employer for the purposes of paragraph 60(j.1). Whether or not a previous employer is otherwise related to the Employer is a question of fact. For the purposes of the Act, related persons or persons related to each other are defined in subsection 251(2) of the Act.
Commencing with the l990 taxation year, the definition in paragraph 146(1)(c) of the Act of "earned income" for RRSP purposes no-longer includes a reference to a retiring allowance. Consequently, that portion of a retiring allowance that is not eligible for rollover to a RRSP under paragraph 60(j.1) of the Act no longer forms part of earned income for the purposes of determining an individul's "RRSP deduction
limit" for a taxation year under paragraph 146(1)(g.1) of the Act. The computation of earned income for RRSP purposes is discussed on pages 20 to 24 of the enclosed Guide.
We trust our comments are of assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate