Revenue Canada Taxation Head Office
XXX
W.C. Harding (613) 957-3499
October 21, 1987
Dear Sir:
This is in reply to you letter of September 23, 1987 in which you requested our clarification of the methods of payout available upon termination for members of deferred compensation plans for purposes of the Income Tax Act (the Act).
Where the provisions of a plan permit and the amounts deferred are not deferred amounts as discussed below, the Department will accept as a method of payout:
1. the payment of a lump sum within 365 days of the termination of employment,
2. the payment of equal installments, either annually, semi- annually or monthly, over a period not to exceed 15 years or
3. the purchase of a fixed term annuity not exceeding 15 years or a life annuity with or without a term certain not exceeding 15 years, on behalf of the terminating employee but held by the employer as owner and beneficiary.
It is the Department's position that any payout election must be made prior to the member's termination of employment.
Effective February 26, 1986, deferred amounts paid into a salary deferral arrangement as defined in the Act, must be reported as income in the year of deferral except where they are paid into a plan under an agreement made prior to that date and the amounts have been deferred in respect of either
(a) services rendered before July 1986 or
(b) services rendered after June 1986 where the taxpayer is obliged to defer receipt of the amount and cannot cancel or otherwise avoid that obligation.
To the extent that amounts are taxed as deferred amounts they will not also be taxed upon payout.
We trust that these comments will be of assistance to you in this matter.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch