Is there anyone in the payroll environment who can honestly say they get bored with retiring allowances? Personally, I find it one of the more challenging topics. Payroll professionals involved in the termination process need to fully understand the legislative requirements specific to retiring allowances to ensure reporting and withholding compliance. A resource that no payroll professional should be without when dealing with this matter is a copy of the Canada Revenue Agency’s (CRA) Interpretation Bulletin (IT) – IT337R4 Retiring Allowances.
Interpretation bulletins are CRA’s policy guidelines and recommendations on the “what’s” and “how’s” of a particular Income Tax Act (ITA) topic. An added feature of IT bulletins is that they tend to translate the legal form of the Act into common every-day language. Also, whereas the Act tends to be vague in some respects, the bulletins provide further interpretation, definitions, and in some cases, examples of how to apply the rules.
Late last fall the CRA revised IT337 to cover changes in the law, as well as reflecting new or revised departmental interpretations. The bulletin incorporates new departmental positions, clarifies existing positions and reflects the relevant provisions of the Income Tax Act as they read at the time of issue.
For the most part, the rules respecting retiring allowances remain substantially the same. However, it is important to make note of the following additions and clarifications.
Subsection 248(1) of the ITA defines retiring allowance to mean an amount received
a) on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer’s long service, or
b) “in respect of “ a loss of office or employment of a taxpayer, whether or not received as, on account or in lieu of payment of, damages or pursuant to an order or judgment of a competent tribunal,
by the taxpayer or, after the taxpayer’s death, by a dependant or a relation of the taxpayer or by the legal representative of the taxpayer.
Paragraph five of the bulletin is new and discusses the meaning of the words “in respect of” as relates to the definition of a retiring allowance.
A retiring allowance includes an amount received in respect of a loss of office or employment. In this context, the words “in respect of” have been held by the Courts to imply a connection between the loss of employment and the subsequent receipt, where the primary purpose of the receipt was compensation for the loss of employment. Two questions set out by the Courts to determine whether a connection exists for purposes of a retiring allowance are as follows:
• But for the loss of employment would the amount have been received? and,
• Was the purpose of the payment to compensate a loss of employment?
Only if the answer to the first question is “no” and the answer to the second question is “yes”, will the amount received be considered a retiring allowance.
Outside of the fact that an employee is receiving a payment, if it wasn’t for the loss of work or position would the employer still be providing this individual with the payment? Ultimately if the answer to the first question is yes, then in the CRA’s eyes, the payment is not a retiring allowance.
Paragraph seven clarifies the difference between the timing of the occurrence of the retirement (or loss of office or employment) and the timing of payment of the retiring allowance.
Paragraph eight – part b, has been revised to allow for exceptions to the rule that termination of employment is not considered to have occurred where the employee goes to work for the same employer or an affiliate and arrangements for such re-employment were made prior to the termination. Please confirm carefully with the information in the bulletin to ensure your situation warrants the identical treatment. In fact the bulletin also recommends employers obtain confirmation from the CRA that an exception does apply to their situation.
The twelfth paragraph contains a new position that personal injuries sustained before or after a loss of employment may be viewed as unrelated to the loss of employment and that general damages received relating to such injuries would be non-taxable.
Payments in lieu of earnings for a period of reasonable notice of termination by virtue of the terms of the taxpayer’s employment (explicit or implied) are considered income from employment. However, where a payment of amount received in respect of a loss of office or employment of a taxpayer, whether or not received as, on account or in damages arising from the loss of office or employment includes an amount in respect of the period of reasonable notice, this amount will be considered a retiring allowance. Again we remind employers to be extremely cautious that the situation they are dealing with is the same as being described in the bulletin.
New paragraph 15 provides a list of amounts that are not considered retiring allowances. Included in the list is a retention bonus as such a bonus would be considered employment income.
New paragraph 21 provides that the eligible portion of a retiring allowance may only be transferred to an RRSP under which the recipient is the annuitant. However, if the recipient has unused RRSP deduction room, an amount received as a retiring allowance may be contributed to either the recipient’s RRSP or to a spousal or common-law partner RRSP, up to a maximum of that room.
The discussion of legal costs has been streamlined since the same information is covered in the current version of IT-99, Legal and Accounting Fees. Also, reimbursement of legal costs is one of the payments on the list of amounts that do not qualify for retiring allowances.
Finally the reference to the form TD2 has been removed. Please remember to visit the CRA’s Web site www.ccra-adrc.gc.ca to pick up the revised copy.
Kimberley Fiume is Director, Client Services for the LeadingEdge Payroll Group and Managing Editor for Payroll ALERT.Categories: Articles