25 May 2004 External T.I. 2003-0050451E5 - Retiring Allowance or Employment Income

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.

Principal Issues: Will a payment made pursuant to a settlement agreement be taxed as a retiring allowance or employment income when the settlement amount is pensionable income?

Position: Employment income

Reasons: The CRA's view is that the accrual of pension benefits indicates that an employment relationship continues to exist, such that the amount would be taxed as employment income.

2003-005045
XXXXXXXXXX Kimberly Duval
(613) 957-8982
May 25, 2004

Dear XXXXXXXXXX:

Re: Settlement Amount - Retiring Allowance or Employment Income

This is in response to your e-mail of November 21, 2003 and our subsequent telephone conversations (Duval/XXXXXXXXXX) inquiring whether a payment made to a former employee would be considered a retiring allowance or a payment in respect of salary, wages or other remuneration in a specific unjust dismissal case. We apologize for the delay in responding to your request.

Our Comments

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, Advanced Income Tax Rulings, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advanced Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

The CRA's general views regarding retiring allowances are contained in Interpretation Bulletin IT-337R4, "Retiring Allowances". However, whether an amount received by an employee, upon or after termination of employment, is salary, wages or other remuneration, and therefore included in income pursuant to subsection 5(1) of the Income Tax Act (the "Act"), or a retiring allowance that is to be included in income pursuant to subparagraph 56(1)(a)(ii) of the Act, is a question of fact. The ultimate determination as to whether an amount would be considered a retiring allowance can only be made after a review of all of the circumstances relevant to a particular situation, namely the employment contract, any other employment agreements and, in this particular case, possibly the court order or judgement giving rise to the payment.

Paragraph 4 of IT-337R4 states the following:

"Whether an individual has retired is a question of fact. Continued participation in a former employer's health plan (for example, providing medical, dental and long term disability coverage) for a restricted period of time would not, in itself, indicate that employment has not terminated, particularly if the employer's plan specifically permits former employees to be covered under the plan. However, if pension benefits continue to accrue to the individual, the accrual indicates that there is an existing employment relationship, since such benefits only accrue to employees. The fact that the employer does not require an individual to report to work is not, by itself, determinative of whether the individual has retired."

The CRA considers that any severance amount paid to an employee that is also pensionable earnings for purposes of the employer sponsored pension plan constitutes employment income and not a retiring allowance. As such, the employer should ensure to treat this amount consistently for purposes of all the statutes administered by the CRA, including the computation of Employment Insurance premiums and benefits and Canada Pension Plan accruals.

We trust that these comments will be of assistance.

Yours truly,

Roxane Brazeau-LeBlond, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate