A.B. Adler (613)957-8962
April 13, 1989
Dear Sirs:
This is in reply to your letter of March 16, 1989 in which you raised several questions with respect to the application of the salary deferral arrangement (SDA) rules under the Income Tax Act (Act) to the following hypothetical example.
We are to assume that, pursuant to a written employment contract made in 1980, an employee is entitled to an annual bonus that under the terms of the contract is to be deferred until the termination of his employment. Further, interest is calculated on the amount of the deferred bonuses and paid annually. Also, no such bonus is deferred in respect of services rendered after June 30, 1986.
We concur with your view that the arrangement would be a "SDA" and that the bonuses deferred thereunder would be "deferred amounts" but for the relevant grandfathering provisions in the Act concerning the application of the definitions of these defined terms.
Your questions and further assumptions follow.
1. Assume that the employment contract provides for an election to be made by the employee before the first day of the month immediately following the termination of his employment. The employee may elect to receive the deferred bonuses as either (a) monthly instalments over 15 years commencing on the first day of the month immediately following the termination of his employment or (b) a lump-sum to be paid within 60 days of the first day of the month immediately following the termination of his employment.
You questioned whether the making of such an election would, in itself, bring into existence a new SDA that would not be grandfathered.
Provided that the provisions of the arrangement permit a payout election, the "SDA" and the "deferred amounts" qualify for grandfather treatment and the payout election is made prior to the employee's termination of employment, it is our position that the elections described above will not bring into existence a new SDA.
2. Assume the employee in question is wrongfully dismissed in October 1988, the payout election referred to in 1. above is not made before his dismissal takes effect, and no amount is paid to the former employee in respect of the deferred bonuses in 1988.
You questioned whether in these circumstances we would consider the amount of deferred bonuses as a deferred amount at the end of 1988 that is includable in the former employee's 1988 income.
Where in fact an employee is wrongfully dismissed, the employee did not have the opportunity to make a payout election before his employment is terminated and he did not receive any portion of the deferred amounts in the year of dismissal, we would generally not consider the amount of the deferred bonuses to be includable in the former employee's 1988 income under paragraph 6(1)(a) of the Act pursuant to subsection 6(11) therein.
3. Assume, the facts are the same as in 2. above except that the former employee sues his former employer for wrongful dismissal in 1988. Further, the employer does not deny the former employee's entitlement to the deferred bonuses and agrees, in 1989, to pay them to him under a payout option described in 1. above pursuant to an election by the employee.
You questioned whether this Department would consider such amounts to be includable in the former employee's income when received as retiring allowances where the former employee elected to receive the deferred bonuses in instalments over 15 years.
It is a question of fact whether a payment made after a loss of employment can be characterized as a retiring allowance for income tax purposes, and accordingly, we are not in a position to comment on this aspect of your example. In general, however, we would expect payments in respect of deferred bonuses made after the termination of employment which payments were not taxable under the salary deferral arrangements rules to be includable in the former employee's income under subsection 6(3) of the Act when received.
We trust that our comments will be of assistance to you.
Yours truly, for Director Financial Industries Division Rulings Directorate