24(1) 5-913303
D. S. Delorey
(613) 957-8953
Attention: 19(1)
January 22, 1992
Dear Sirs:
This is in reply to your letter of November 28, 1991 asking if certain payments would qualify as a "retiring allowance" as defined in subsection 248(1) of the Income Tax Act (the "Act").
More particularly, you set out in your letter a set of hypothetical facts involving an incentive package offered or to be offered to certain employees and request our views on whether or not, depending on the option exercised by an employee under the incentive package, the amounts to be received by the employee would qualify as a retiring allowance. It is our understanding that your enquiry relates to specific transactions, either proposed or completed. Where a transaction is proposed, confirmation of the tax implications arising therefrom should be sought by way of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. Where a completed transaction is involved, the enquiry should be addressed to the relevant District Taxation Office. We offer, however, the following general comments.
A payment received by an employee upon termination of employment would not be disqualified as a retiring allowance solely on the basis that the employee immediately became employed by another employer.
Where an employee terminates his employment with a company by exercising an option available to him under an incentive package offered by his employer, amounts received under the incentive package would normally qualify as a retiring allowance as indicated in paragraph 6 of Interpretation Bulletin IT-337R2. Exceptions to this normal rule would include situations
(a) where the individual is subsequently employed by a person who acquires or continues the business of the former employer (This view was expressed by the Department at the 1989 Canadian Tax Foundation Conference Revenue Canada Round Table.), or
(b) where, as stated in paragraph 4 of IT-337R2, the termination is followed shortly by employment with an affiliate.
For the purposes of determining whether or not a payment qualifies as a retiring allowance, the word "affiliate" is intended to be given its broadest meaning and would include any related or associated company, or any company that is a member of a group of companies that do not deal at arm's length notwithstanding that they may not be related or associated for the purposes of the Act. It is thus our view that two companies would be affiliated for these purposes where one effectively controls the other by virtue of exercisable stock options, or by virtue of a combination of exercisable stock options and economic influence. Where employer A and company B have a close economic bond by virtue of one being a major supplier or customer of the other and A can require B to adopt certain hiring policies with respect to A's former employees, we are not prepared to confirm on a general enquiry basis that A and B would not be affiliated. We are prepared, however, to consider the matter further in the context of an advance ruling request.
As indicated above, where an individual is hired by an affiliate of his former employer shortly after leaving an office or employment, it is the Department's position that the individual has not suffered a loss of employment. This position would in our view also apply where the individual is rehired by the former employer shortly after leaving his employment. It could also apply, depending on the contractual arrangements, where the individual is engaged shortly after leaving his employment to perform services for his former employer as an independent contractor. We are therefore not prepared to confirm, on a general enquiry basis, that this position would not apply to the situations outlined in your letter. We are prepared, however, to consider the matter further in the context of an advance ruling request.
Where, in an arm's length situation, a long-term employee has retired without any assurance at the time of retirement of being hired by an affiliate, or being rehired by his former employer, and receives from the former employer a payment based on long service, it is the Department's position that the payment would qualify as a retiring allowance notwithstanding that the individual might be hired by the affiliate, or rehired by the former employer, at a later time when circumstances have changed. This position would not apply, however, where such non-assurance exists at the time of agreeing to terminate his employment but not on the last day of employment; i.e., between the time of agreement and the last day of employment arrangements are made for the employee to be rehired or to take up employment with an affiliate.
It is a question of fact as to whether or not an individual would be considered to have received a payment in respect of a loss of employment, or upon or after retirement from an office or employment in respect of long service, where he is engaged shortly after leaving his employment to perform services for his former employer as an independent contractor. Such a determination can be made only after a review of all relevant documentation. In any event, where it is a question of whether or not a payment was received upon or after retirement from an office or employment in respect of long service, the comments in the preceding paragraph would apply.
Our comments reflect an expression of opinion only and are not binding on the Department, as explained in paragraph 21 of Information Circular 70-6R. We trust however that they are of assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate