Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation]
Is an amount paid a retiring allowance?
Position: Yes
Reasons: Employment was terminated
October 23, 2000
XXXXXXXXXX Tax Services Office Headquarters
Audit Division Income Tax Rulings Directorate
Attention: XXXXXXXXXX Michel Lambert
(613) 957-8953
2000-002747
Retiring Allowance - Meaning of Affiliated Employers
This is further to your memo of May 18, 2000 and our telephone conversations (XXXXXXXXXX/Lambert) of August 30 and September 14, 2000. You requested our opinion on a retiring allowance. More specifically, you wish to know whether two employers are affiliated employers in order to determine whether an amount paid constitutes a retiring allowance within the meaning of that expression in subsection 248(1) of the Income Tax Act (the Act).
THE FACTS
1. XXXXXXXXXX.
2. In XXXXXXXXXX, a corporate reorganization was carried out, the objectives of which were to allow XXXXXXXXXX shareholders of the corporation (XXXXXXXXXX) to sell their shares and to allow XXXXXXXXXX to set up a corporate structure that would allow them to start a new business.
3. XXXXXXXXXX.
4. The XXXXXXXXXX transferred its XXXXXXXXXX shares and in return received shares giving it control of XXXXXXXXXX. Immediately thereafter, the shares received from XXXXXXXXXX were transferred to XXXXXXXXXX's holding company [Holdco], also incorporated in XXXXXXXXXX in exchange for shares that provided XXXXXXXXXX with direct control of Holdco.
5. As a result of those transactions, XXXXXXXXXX was controlled by XXXXXXXXXX while XXXXXXXXXX then controlled its new employer, XXXXXXXXXX, also resigned as a member of the XXXXXXXXXX Board of Directors.
6. The XXXXXXXXXX borrowed from XXXXXXXXXX an amount of $XXXXXXXXXX in order to finance the redemption of its shares then held by XXXXXXXXXX.
7. The XXXXXXXXXX paid the XXXXXXXXXX an amount of $XXXXXXXXXXX which it described as a retiring allowance. The amount was required to be paid no later than XXXXXXXXXX. The resolution authorizing the payment was signed by XXXXXXXXXX.
8. XXXXXXXXXX, the taxpayer actually received the amount of XXXXXXXXXX and transferred the full amount to a registered retirement savings plan.
9. During our telephone conversation on August 30, you told us that XXXXXXXXXX has been the president of XXXXXXXXXX since its incorporation on XXXXXXXXXX. Furthermore, at the time the $XXXXXXXXXX was paid to him, he was already working on setting up XXXXXXXXXX's new business.
10. During our telephone conversation on September 14, you told us that XXXXXXXXXX had stopped contributing to the XXXXXXXXXX registered pension plan. Since that date, XXXXXXXXXX no longer participates in a registered pension plan. His XXXXXXXXXX employment income for XXXXXXXXXX was $XXXXXXXXXX and for XXXXXXXXXX was $XXXXXXXXXX. In XXXXXXXXXX, his income from his new employer was $XXXXXXXXXX. You have also advised us that the total amount of XXXXXXXXXX would be eligible for a deduction under paragraph 60(j.1) if it was determined to be a retiring allowance.
TAXPAYER'S OPINION
The taxpayer's representative believes that you should use the definition of affiliated person in subsection 251.1(1) to determine whether the two employers are affiliated employers. According to this definition, the two corporations would not be affiliated.
YOUR OPINION
You stated that paragraph 4 of Interpretation Bulletin IT-337R2 indicated that termination of employment with an employer followed shortly thereafter by employment with an affiliated employer does not constitute retirement or loss of office or employment. This version of the bulletin did not specify the meaning of the term “affiliated employer”.
You believe, however, that the term affiliated should be given its general meaning and therefore include a related or associated company. In your view, the former employer, XXXXXXXXXX, is related to the new employer, XXXXXXXXXX.
Regarding the application of subsection 251.1(1), which relates to the concept of affiliated persons, you are of the view that even though the preamble mentions that the definition applies to the Act as a whole, this concept was introduced specifically to limit losses on the transfer of property to certain taxpayers. Although the representative told you that there was no agreement between the parties (criterion mentioned in IT-337R3) regarding the termination of employment with XXXXXXXXXX and the beginning of employment with XXXXXXXXXX, you believe that the objectives of the reorganization show that the taxpayer had control over events.
OUR OPINION
THE ACT
According to the definition in subsection 248(1), a retiring allowance is an amount received by a taxpayer in one of the following circumstances:
(a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer’s long service, or
(b) in respect of a loss of an office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal… .
BULLETIN IT-337R3
According to paragraph 3 of Interpretation Bulletin IT-337R3, retirement or the loss of an office or employment does not include termination of employment with an employer where, pursuant to a prior agreement, it is followed by employment with an affiliated employer.
After analyzing the relevant provisions of the Act and considering the facts you have submitted to us, we are of the view that XXXXXXXXXX was employed by an affiliated employer, within the meaning of the Bulletin, at the time he received the amount of $XXXXXXXXXX.
THE DIRECTORATE’S NEW APPROACH
In recent months, we have been revising our approach to retiring allowances in the cases referred to in paragraph 3 of Interpretation Bulletin IT-337R3 to allow a transfer to an RRSP of a severance allowance received in certain circumstances and based on the facts of each case. In the situation described in your request, we are of the view that it is reasonable to apply this new approach. The Directorate intends to indicate its new position in a forthcoming publication of Technical News.
In the case you have submitted to us and after considering all the facts you have stated, we are of the view that XXXXXXXXXX had ceased his employment with XXXXXXXXXX. In addition, the amount of $XXXXXXXXXXX seems reasonable in the circumstances. Consequently, we recommend that you accept this amount as a retiring allowance.
For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the Legislative Access Bank version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
We hope you find these comments useful.
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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