Revenue Canada Taxation Head Office
G. Kauppinen (613)957-3495
April 16, 1987
Dear Sirs:
This is in reply to your letter dated January 9, 1987 wherein you requested this Department's interpretation as to whether certain early retirement incentive payments constitute retiring allowances within the definition contained in subsection 248(1) of the Income Tax Act ("Act"). You have also requested our opinion as to whether the years during which such payments were made would constitute eligible pensionable service years within the context of paragraph 8(e) of Information Circular 72-13R7.
You have posed the following hypothetical situation:
1. Corporation A, a company carrying on business in Canada, has a registered defined benefit pension plan.
2. The registered pension plan provides for normal retirement at age 65 and early retirement, at a reduced pension, at age 55.
3. In order to encourage early retirement or to eliminate employment positions due to economic or other reasons Corporation A, in recognition of long service, will provide "XXXX" payments to employees who retire prior to age 55.
4. The bridging payments are either in the form of a lump-sum amount at the time of ceasing service to the company or as bi-monthly payments until age 55. The payments may be equal to or less than the employee's former salary. If paid on a lump-sum basis the amount represents the net present value of the bi-monthly payments.
5. At the time of termination of employment, an agreement between the employee and Corporation A is established to formalize the terms of the termination and the bridging payments.
6. The employee does not provide any service to Corporation A, nor is he or she entitled to any of the company's benefit packages at the time of receiving the bridging payments.
7. Contributions to the pension plan are made until the employee turns age 55 by Corporation A, but only in respect of employees in receipt of the bi-monthly bridging payments, thereby, increasing the pension available at age 55 over what would have been attained had the employee chosen the lump-sum payment.
8. The same bridging payments may also be received by an employee between the age of 55 and 65 where the employee receives the amounts in recognition of long service until he or she attains age 65 and receives full pension.
9. The employees and Corporation A are acting at arm's length.
You have requested our opinion on the following questions assuming the foregoing:
A. Would the bridging payment(s) received as a lump-sum or semi-monthly prior to age 55, in recognition of the employee's long service, be considered as a retiring allowance within the meaning of subsection 248(1) of the Act and thereby be included in income of the recipient pursuant to subparagraph 56(l)(a)(ii) of the Act?
B. Would the bridging payment(s) received as a lump-sum or semi-monthly between age 55 and 65, in recognition of the employee's long service, be considered as a retiring allowance within the meaning of subsection 248(1) of the Act and thereby be included in income of the recipient pursuant to subparagraph 56(1)(a)(ii) of the Act?
C. Should the bridging payment(s) paid either in lump-sum or on a bi-monthly basis be reported on Form T4 or Form T4A by Corporation A?
D. Would the year to which the bridging payment(s) relates qualify as a pensionable service year for purposes of Corporation A's pension plan?
E. If contributions were made by Corporation A to its registered pension plan on behalf of employees in receipt of bridging payments whom the company considered to be earning pensionable service, would a penalty be imposed on the pension plan if Revenue Canada considered that the employees were not earning pensionable service?
Our Opinion -----------
Our response to your questions A. and B. above is in the affirmative. These payments should be reported on Form T4A by Corporation A.
We have been advised by our Registered Pension and Deferred Income Plans Division that the years in which the "bridging payments" in question are made would not constitute eligible pensionable service years in the context of paragraph 8(e) of Information Circular 72-13R7 for either funding purposes or for benefit calculation.
If contributions were made by Corporation A to its registered pension plan on behalf of employees in receipt of such bridging payments, such contributions would, of course, be non-deductible. In addition, it is possible that the registration of the plan could be revoked.
These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case and, as stated in paragraph 24 of Information Circular 70-6R, they are not binding on this Department.
We trust the foregoing clarifies our position.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch