5 November 1997 External T.I. 9727235 - PAY IN LIEU OF NOTICE, RA

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

What constitutes "pay in lieu of notice"?

Position:

Question of fact.

Reasons:

Amount is required under employment statutes, employment contract or common law.

                                      		972723
XXXXXXXXXX                            	M.P. Sarazin

November 5, 1997

Dear Sir/Madam:

Re: Pay in Lieu of Notice

This is in reply to your letter dated October 11, 1997, wherein you requested clarification with respect to the determination of whether an amount received upon termination would be classified as "pay in lieu of notice".

The determination of whether a lump-sum amount or a portion of the lump-sum amount paid to an employee on termination of employment would constitute "pay in lieu of notice" is a question of fact that could only be determined after all of the facts pertaining to each particular case have been reviewed. Where an employee's employment is terminated, employment statutes, employment contracts or common law may require that the employee's employment be continued for a certain period known as the "notice period". However, in lieu of continuing the employee's employment for the notice period, the employer may pay the employee's normal wages for the notice period in a lump-sum and terminate the employee's employment as of that time. If this occurs, the Department takes the position that the lump-sum payment of the amount in lieu of notice is not a retiring allowance but is normal employment income. Please refer to paragraph 15 of the enclosed Interpretation Bulletin IT-365R2.

The Employment Standards Act (Ontario) (the "ESA") defines termination pay to include amounts required under section 57 of the ESA. Section 57 imposes a minimum number of weeks notice prior to termination which is dependent on the years of employment. During this period of notice, the employee is entitled to his or her regular wages. If the employment is terminated without the written notice required by the ESA, the employee is entitled to an amount equal to the regular wages payable over the same number of weeks for which notice was required. This amount which may be part of or all of the amount received by the employee on termination would constitute employment income and not retiring allowance.

Retiring allowance is defined in subsection 248(1) of the Income Tax Act to mean an amount received on or after retirement from an office or employment in recognition of one's long service or in respect of a loss of office or employment. Consequently, any severance pay received upon or after retirement or paid in respect of a loss of office or employment, over and above the amount that represents pay in lieu of notice, would generally be considered a retiring allowance.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch