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:
1) Is the "severance amount" a retiring allowance?
2) Is the amount "compensation" for RPP purposes?
Position:
1) Yes
2) No
Reasons:
1) The amount is a lump-sum payment (not salary continuance). As such, subparagraph 56(1)(a)(ii) applies in priority to subsections 5(1) or 6(1), since subparagraph 56(1)(a)(ii) is the more specific provision.
2) A retiring allowance is not compensation as defined in subsection 147.1(1) of the Act.
XXXXXXXXXX 2000-004734
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you ask for an advance income tax ruling on behalf of the above taxpayer. We also acknowledge receipt of several facsimiles and information confirmed in several telephone calls XXXXXXXXXX.
DEFINITIONS
For purposes of this letter, the relevant definitions are the following:
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1. as amended to the date hereof.
(b) "XXXXXXXXXX's Report" means the decision issued by XXXXXXXXXX.
(c) "CCRA" means the Canada Customs and Revenue Agency.
(d) "Employee" means an employee of the Employer, who is entitled to Severance. Approximately XXXXXXXXXX Employees qualify for Severance.
(e) "Employer" means XXXXXXXXXX.
(f) XXXXXXXXXX means the early retirement incentive program associated with the downsizing announced on XXXXXXXXXX provided by the Employer to employees with at least XXXXXXXXXX years of service as of XXXXXXXXXX.
(g) "Regulations" means the Income Tax Regulations as amended to the date hereof.
(h) "RRSP" has the meaning assigned by subsection 146(1) of the Act.
(i) "Severance" has the meaning assigned by the XXXXXXXXXX's Report, as described in 8 below.
To the best of your knowledge and that of the Employer, none of the issues involved in this ruling are:
a) in an earlier return of the Employer, an Employee, or a related person;
b) being considered by any tax services office or tax centre in connection with a previously filed tax return of the Employer, an Employee, or a related person;
c) the subject matter of any notice of objection filed pursuant to the Act by the Employer, an Employee, or a related person;
d) before the courts; or
e) the subject of an advance income tax ruling previously issued by the Directorate.
Our understanding of the facts and the proposed transactions is as follows:
FACTS
1. XXXXXXXXXX.
2. The Employer is engaged in the business of XXXXXXXXXX. It owns XXXXXXXXXX assets including machinery and equipment and leases used in the XXXXXXXXXX business.
3. At XXXXXXXXXX, the Employer employed approximately XXXXXXXXXX employees at its XXXXXXXXXX.
4. On XXXXXXXXXX, the Employer announced that it would be withdrawing from the XXXXXXXXXX business, closing one of its XXXXXXXXXX by XXXXXXXXXX and selling all or substantially all of the assets used in the business of XXXXXXXXXX. Coincident with the announcement, the XXXXXXXXXX committed funds for early retirement incentives, severance and XXXXXXXXXX programs for affected employees. Approximately XXXXXXXXXX of the XXXXXXXXXX employees qualified for early retirement incentives under the Employer's XXXXXXXXXX early retirement incentive plan. An additional XXXXXXXXXX employees qualified for early retirement incentives under the XXXXXXXXXX.
5. On XXXXXXXXXX, the Employer announced that the XXXXXXXXXX, resulting in immediate workforce reductions with further reductions to follow.
6. On XXXXXXXXXX, the Employer filed with the XXXXXXXXXX of employment pursuant to XXXXXXXXXX. The notice indicated that the employees would be terminated no earlier than XXXXXXXXXX, and no later than approximately XXXXXXXXXX.
7. After unsuccessful negotiations between the Employer and the unions, XXXXXXXXXX was appointed pursuant to XXXXXXXXXX to determine the appropriate retirement and severance arrangements to be provided to the employees.
8. On XXXXXXXXXX, the XXXXXXXXXX Report was filed with the XXXXXXXXXX providing for the following benefits for approximately XXXXXXXXXX employees of the Employer:
XXXXXXXXXX.
In addition to the XXXXXXXXXX employees entitled to the XXXXXXXXXX (see 4 above), the XXXXXXXXXX's Report provided that another XXXXXXXXXX employees qualify for the XXXXXXXXXX.
Severance
The remaining group of approximately XXXXXXXXXX Employees are entitled to a payment equal to XXXXXXXXXX salary for each year of continuous service with the Employer. For the purpose of calculating the amount of the Severance, Employees are deemed to be employed until XXXXXXXXXX.
Lost XXXXXXXXXX Compensation
Employees who are entitled to Severance may accrue additional pension benefits for the period of time calculated according to the Severance benefit formula.
XXXXXXXXXX and XXXXXXXXXX Benefits
The Employer will pay $XXXXXXXXXX to a trust fund, on an as-needed basis, in order to provide XXXXXXXXXX and XXXXXXXXXX benefits to Employees and/or their families. Only employees entitled to Severance are entitled to the XXXXXXXXXX and XXXXXXXXXX benefits.
Employment Opportunities - XXXXXXXXXX Work
Any XXXXXXXXXX work available to be done by the Employer will be offered to the employees in order of the employees' seniority. Such employment will not be covered by any existing or future collective agreements, nor will it be considered as service for pension or early retirement incentive plan purposes, nor will it result in eligibility for additional notice or severance pay. Any wages earned by an employee receiving payments under the early retirement incentive plans will be set off against the employee's early retirement incentive plan entitlement.
XXXXXXXXXX Benefits
Employees entitled to Severance will be entitled to certain XXXXXXXXXX benefits for the period of time as calculated under the Severance benefit.
9. The Employer is currently negotiating to sell the assets of the Employer to an arm's length purchaser. Approximately XXXXXXXXXX other employees of the Employer will be re-employed by the purchaser. At this time, these employees do not qualify for the benefits outlined in 8 above.
10. The Employer has terminated all but approximately XXXXXXXXXX Employees, and has paid the Severance as outlined in 8 above.
PROPOSED TRANSACTION
11. The Employer will terminate approximately XXXXXXXXXX of the remaining XXXXXXXXXX Employees and will pay Severance as outlined in 8 above on the earlier of the day the Severance is paid and XXXXXXXXXX.
12. The remaining approximately XXXXXXXXXX Employees will remain employed by the Employer as part of a "shell or wind-up" group under a term employment agreement. At the end of the term, these Employees will be terminated and paid Severance as outlined in 8 above.
PURPOSE OF THE PROPOSED TRANSACTIONS
With the sale of the assets, the Employer does not require the services of the vast majority of its employees and wishes to pay the Severance in accordance with its legal obligations and in compliance with the recommendations made in the XXXXXXXXXX's Report.
RULINGS GIVEN
Provided that the statement of facts and the description of the proposed transactions are correct and constitute a complete disclosure of all the relevant facts and terms of the proposed transaction, and that the proposed transaction is completed in the manner described above, we rule as follows:
A. Severance received by an Employee as outlined in 11 and 12 above will constitute a "retiring allowance" as that term is defined in subsection 248(1) of the Act, and will be included in the income of the Employee in the year of receipt by virtue of subparagraph 56(1)(a)(ii) of the Act.
B. Severance contributed by an Employee to an RRSP of which he/she is the annuitant will be deductible by the Employee pursuant to paragraph 60(j.1) of the Act to the extent permitted therein.
C. Severance amounts received as described in Ruling A. do not constitute income from employment as contemplated by section 5 or 6 of the Act, nor do they constitute "compensation" as that term is defined in subsection 147.1(1) of the Act.
The above income tax rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R3 Advance Income Tax Rulings dated December 30, 1996, issued by the CCRA, provided that the proposed transactions are completed on or before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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