In a March 23, 2017 Tax Court of Canada case (Freitas vs. H.M.Q., 2016-905(IT)I), at issue was whether a payment to a retiring partner would constitute pensionable earnings.

In this situation, the taxpayer (Mr. A) retired from an international accounting firm in 2007. Pursuant to the partnership agreement, he was entitled to a share of the partnership income from that point forward. These amounts were allocated out to the retired partner under Subsection 96(1.1). This effectively allows the allocation of partnership income to an ex-partner (see VTN 415(7)).

Taxpayer loses
The taxpayer argued that the amount would be exempt from CPP contribution as it was a retiring allowance. The Court noted that a “retiring allowance” must be paid in respect of retirement from an office or employment.

The partner had not retired from employment as partners are not employees. As the income was determined to be received as a portion of the partnership income, rather than as employment income, it would not fit the description of a “retiring allowance”. Instead, it would be professional income. The Court then concluded that it was correctly included as self-employed earnings for the purposes of Sections 13 and 14 of the CPP Act.

whether current retirement remuneration agreements are pensionable

The Court then determined that such professional income does not fall within any of the exceptions from pensionable earnings.

Editors’ Comment
The retired partner had at least partially based his position on a 1996 interpretation from CRA which stated:

“income allocated pursuant to Subsection 96(1.1) of the Act is business income but for the purposes of the CPP provision is not considered to be from a business carried on by the retired partner and consequently such a partner is not required to contribute to CPP solely as result of receiving such income.”

The Court noted that it did not have the relevant context of this opinion in order to assess whether it would be applicable. As well, regardless of the context, it was uncertain whether CRA’s conclusion was correct at law.

This case has been appealed to the Federal Court of Appeal (see A-130-17, http://cas-cdc-www02.cas-satj.gc.ca/fca-caf/IndexingQueries/infp_RE_info_e.php?court_no=A-130-17&select_court=A).