DATE March 5, 1987
TO - HALIFAX DISTRICT OFFICE
FROM - HEAD OFFICE Leasing and Financing Section S.P. Bridgeman
ATTENTION J.R. Miller
Audit Review
RE: Retiring Allowance
This is in reply to your memorandum of January 7, 1987 wherein you asked for our opinion as to whether an amount received would qualify as a retiring allowance under subparagraph 56(1)(a)(ii) of the Income Tax Act (the "Act") and thus be eligible for a rollover into the individual's RRSP subject to the constraints contained in paragraph 60(j.1) of the Act.
The hypothetical situations, as we understand them, are summarized below and our responses to questions posed are set out in the order in which they appear in your memorandum.
Situation 1
Employee works for Company A. Company A sells to Company B its operating assets. Company A and Company B are not associated or affiliated in any way. Employee commences employment with Company B in the same capacity as what his activities were with Company A. Company A pays Employee an amount in recognition of either a loss of office or employment and/or in recognition of the employee's long service to Company A. Employee deals at arm's length with Company A.
In your opinion, the payment by Company A to the employee would qualify as a retiring allowance if Companies A and B are not affiliated. Your basic concern is with the interpretation of "affiliate" as used in paragraph 4(b) of Interpretation Bulletin IT-337R2 .
The term affiliate was used to include any group of companies which did not deal at arm's length even if they were not related or associated for income tax purposes. It is our opinion that companies are affiliated if they have an interdependent working relationship which among other things permits or encourages the exchange of employment opportunities. On the basis of the information given, it would appear that Company A and Company B are not affiliated and the payment to the employee would qualify as a retiring allowance.
Situation 2
Company A disposes of its assets to its wholly owned subsidiary Company B, who in turn disposes of its assets to a non-affiliated or associated Company C. When the assets are sold to each company, an employee previously employed with Company A commences employment with Company B and then Company C respectively. A payment is made by Company B to the employee for either a loss of office or employment and/or recognition of the employee's long term of service performed for both Company A and Company B.
In your opinion, based on the wording in paragraph 60(j.1) of the Act, the payment by Company B could cover services performed for both companies and be treated as a retiring allowance.
Since Company A controls Company B, they are related for purposes of paragraph 60(j.1) of the Act. We also assume for the purposes of this opinion that the employee in question effectively worked for Company B and that he deals at arm's length with both Company A and Company B.
It is our opinion that the payments by Company B would qualify as a retiring allowance. The Department's position remains as stated in paragraph 5 of IT-337R2 and covers this situation.
Situation 3
Mr. A wholly owns Company A (holding company) which in turn wholly owns Company B (operating company). Company B disposes of its assets to a non-affiliated Company C. Mr. A commences employment with Company C when Company C acquires the assets from Company B. Company B pays Mr. A an amount in recognition of loss of office or employment and/or in recognition of Mr. A's long service as general manager of Company B. It is the intention that Company B will be wound up into Company A.
We agree with your opinion that the payments by Company B to the employee would qualify as a retiring allowance provided Company C is not affiliated with Company B and further provided Mr. A is no longer employed by Company A or Company B.
Provided the amount of the retiring allowance is reasonable in the circumstances, it is a deductible expense to the employer when a legal obligation to pay is created.
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch