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: Definition of "retirement" for purposes of retiring allowance.
Position: Taxpayer was not retired when the "retiring allowance" was paid.
Reasons: IT - 337R3, paragraph 4. & Serafini case. The terms of the "severance agreement" are such that the employment relationship had not ended when the allowance was paid.
October 29, 1999
HEADQUARTERS HEADQUARTERS
Trust Accounts Division Income Tax Rulings and
Policy & Technical Services Interpretations Directorate G. Kauppinen
Attention: Lorraine Maisonneuve 957-8971
991898
Retiring Allowance
This is in reply to your facsimile dated July 8, 1999, wherein you requested our comments regarding the terms of a severance agreement.
Facts
The employee party to the severance agreement has ostensibly retired as of XXXXXXXXXX at which time he was paid $XXXXXXXXXX. This amount was characterized in the severance agreement as a "non-taxable retiring allowance" and was deposited directly into the employee's RRSP.
Other terms of the severance agreement include:
1. The company will pay the employee his current salary from XXXXXXXXXX until XXXXXXXXXX.
2. The employee will continue to have coverage for company-paid fringe benefits up to and including XXXXXXXXXX with the exception of weekly indemnity and long-term disability insurance.
3. The company may require the employee to work for up to XXXXXXXXXX hours per week up to and including XXXXXXXXXX. After that, if agreeable to the employee, he will work for the company "as a consultant for a fee of $XXXXXXXXXX per hour with a minimum requirement of XXXXXXXXXX hours per occurrence".
4. The company shall pay the employee $XXXXXXXXXX per month from XXXXXXXXXX to XXXXXXXXXX. This amount represents "the Canada Pension Plan benefits [the employee] would have received had he applied for his Canada Pension Plan reduced benefits commencing XXXXXXXXXX".
5. The company shall also pay the employee $XXXXXXXXXX per month from XXXXXXXXXX to and including XXXXXXXXXX "as an additional bonus".
It is our opinion, particularly in view of facts 1 and 2 enumerated above, that the employee cannot be considered to have "retired" from his employment on XXXXXXXXXX. The fact situation is similar to that in Serafini v. M.N.R., 89 D.T.C. 653, [1989] 2 C.T.C. (T.C.C.), wherein the taxpayer accepted an early retirement package which provided that he was to cease employment duties as of October 1, 1985, but would continue to receive his current salary and benefits until October 30, 1986 including the accrual of pensionable services. The Court held that the amounts received between October 1, 1985 and October 30, 1986 were not retiring allowances and that the situation could "be likened to a pre-retirement leave with full pay and benefits".
Consequently, the $XXXXXXXXXX paid directly to the employee's RRSP on or about XXXXXXXXXX cannot be considered to have been received by the employee "on or after retirement" as required by the definition of "retiring allowance" contained in subsection 248(1) of the Act. Therefore, the roll-over under paragraph 60(j.1) was not available and the $XXXXXXXXXX is fully taxable to the employee in 1999. The employee will also be subject to Part X.1 tax to the extent that this $XXXXXXXXXX contribution exceeds his unused RRSP deduction room for 1999.
Furthermore, it is our opinion that the employee will "retire" on XXXXXXXXXX when his current salary and company-paid fringe benefits cease. Therefore, the $XXXXXXXXXX and $XXXXXXXXXX 08 referred to in facts 4 and 5 enumerated above should not be considered as salary continuance. These amounts could be characterized as either pension benefits or a retiring allowance. The facts in this particular case lead us to conclude that these amounts are installments of a "retiring allowance" within the meaning of the definition contained in subsection 248(1). Consequently, such amounts are eligible for roll-over to the employee's RRSP to the extent allowed by paragraph 60(j.1).
We trust the foregoing is of assistance. If there are further questions, please contact Gord Kauppinen at (613) 957-8971.
P. Spice
Manager
Deferred Income Plans Section
Income Tax Rulings
and Interpretations Directorate
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