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:
Treatment of amounts as retiring allowances
Position:
Opinion substituted for ruling. general comments provided
Reasons:
Routine information. No specific transaction yet proposed.
3-962465
XXXXXXXXXX W. C. Harding
Attention: XXXXXXXXXX
August 2, 1996
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of July 8, 1996 in which you requested the above-noted advance income tax ruling.
As discussed during our telephone conversation of July 25, 1996, (XXXXXXXXXX-Harding) we are unable to provide a ruling based on the information provided. However, we can provide the comments below that may be of assistance to you in understanding the Department's position on these matters and in preparing any subsequent ruling request.
In your letter you outlined a situation pertaining to the downsizing program of several employers and a policy pertaining to the possible re-employment at a later date of the employees terminated under the program. You then raised several concerns. Those concerns and our comments on them are as follow.
Question 1.
Are employees considered to have retired if they are rehired subsequent to their termination?
Answer.
You have referred to our file 9330395 and concluded that an employee would not be considered to have retired if re-employed shortly after termination. However, the relevant portions of that letter may be paraphrased as follows:
"The Department's position on the payment of retiring allowances is contained in Interpretation Bulletin IT-337R2,... As stated at paragraph 4 thereof, retirement or loss of employment does not include a transfer from one office or position to another with the same employer or termination of employment with one employer followed shortly by employment with an affiliated employer.
Where an individual is re-employed (on a casual, part-time or contract basis) by the former employer or an affiliated employer shortly after leaving an office or employment, it is the Department's position that the individual has not retired or suffered a loss of employment or office.
Where, in an arm's length situation, an employee has retired (or been terminated) without any assurance at the time of retirement (or termination) of being rehired by the former employer... it is the Department's position that (a retiring allowance may be paid) notwithstanding that the parties have an understanding that the individual might be rehired by the former employer at a later time when circumstances have changed.... (This position will not apply) however, where, between the date of the notice of retirement or of termination and the last day of employment, arrangements are made for the employee to be rehired."
Comments on the rehiring of employees can also be found on page 5 of the Department's publication Technical News No. 7 which is available from your local Tax Services Office.
A key step to determining the proper treatment to be applied in most downsizing arrangements is the identification of exactly when an employee has been terminated. For example, in a typical downsizing program employees may be identified as being redundant or surplus and given notice of their status. They may then be provided with a period of employment in which they may seek suitable alternate employment with the employer or a related employer. If at the end of this period they have not found alternate employment, they may be notified of their final termination. Generally this period of employment will also cover a period of employment giving notice of the employees' termination (i.e. a period that is required by statute, contract or common law).
Usually, at some point in the period, employees are obliged, or offered the opportunity, to receive a payment in respect of the declaration of their redundancy or surplus status. The employees may then be terminated immediately or may be retained as employees for all or part of the period. In such circumstances, if the employees accept a payment in lieu of remaining employed for the duration of the redundancy or surplus period and they have no knowledge or assurance of any future employment with the employer or an affiliated employer at that time, the Department will accept that the employees have retired. On the other hand, if the employees accept the payment but remain employed for a further period of time, in order for the payment to be considered a retiring allowance, it must also be clearly established at the time of payment that it was being paid in respect of a loss of office or employment that will occur at the end of the period. This would be a question of fact that would have to be determined on a case by case basis.
When a payment is made in respect of an employee's redundant or surplus status it will normally be considered to be a retiring allowance. However, please note the following replies to the remaining questions on this matter.
Question 2.
Will payments made "in lieu of notice" qualify as a retiring allowance?
Answer.
As noted above, employment standards law, common law, or the terms of an employment contract may require a period of notice of termination that must be provided to an employee. However in lieu of continuing employment for this period an employer may pay the employee's normal wages in a lump sum and terminate the employment immediately. If this occurs, the Department takes the position that the payment of the amount in lieu of the required notice is not a retiring allowance but is normal employment income. Please refer to paragraph 15 of the Department's Interpretation Bulletin IT-365R2.
It should also be noted that such laws or contractual terms may also require the payment of severance pay as a result of the termination. It is the Department's position that severance pay is a retiring allowance. If a single payment is made in satisfaction of an employee's severance entitlements, notice of redundancy or surplus, and notice of termination, it is a question of fact what portion may be treated as a retiring allowance. However we will generally permit the whole payment to be treated as a retiring allowance if, on balance, it is appropriate to do so.
Further discussion of this topic may be found in the Departments reply to Question No. 34 of the 1993 Canadian Tax Foundation Conference Round Table.
Question 3.
If a terminated employee is rehired, will they be required to reverse any transfer of a retiring allowance to an RRSP?
Answer.
The provisions of the Income Tax Act (the "Act") do not require the repayment of an amount that qualified as a retiring allowance if an employee is rehired after they were terminated.
Question 4.
Following from question 3, if a reversal is not required, would the transfer result in an over-contribution to the RRSP that could result in the application of tax under Part X.I of the Act.
Answer.
If an amount that properly qualified as a retiring allowance is transferred to an RRSP to the extent permitted by paragraph 60(j.1) of the Act, it will not be subject to Part X.I tax.
Question 5.
If an employee is required to repay an amount received as a retiring allowance, will the individual be entitled to a deduction for the repayment?
Answer.
Yes, subparagraph 60(n)(i.1) of the Act will permit the deduction of the amount repaid.
Question 6.
If an employee is required to repay all or a portion of an amount received as a retiring allowance, is there a requirement that it be paid out of an RRSP to which it was transferred?
Answer.
If the amount must be repaid because of some other statute or contractual obligation, the Act does not require the repayment to be made from the RRSP to which it was transferred. It should also be noted that once a transfer is made to an RRSP in respect of any year of service, the provisions of subsection 60(j.1) of the Act will preclude any future transfer of an amount in respect of those same years whether or not the previous amount transferred to the RRSP is withdrawn and returned to the employer.
The above comments are based on our understanding of the law as it applies in general and may or may not apply to the circumstances of a particular case. They do not form an advance income tax ruling and they are not binding on the Department.
Your deposit will be returned under separate cover.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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