2016-0632151E5 Retiring Allowance - 60(j.1)

Principal Issues: Will the amount paid to a taxpayer on retirement be a retiring allowance? Can the amount be transferred under paragraph 60(j.1) to the taxpayer's RRSP?

Position: Question of fact. Depends on whether the amount received by the taxpayer is a retiring allowance.

Reasons: Whether an amount paid to a taxpayer on retirement is a retiring allowance is a question of fact and will depend, amongst other things, on whether the amount was received due to the taxpayer’s employment. We do not have sufficient information and/or documentation to make this determination. Accordingly, general comments are provided.

Author: Allen, Gary
Section: 56(1)(a)(ii), 60(j.1)

XXXXXXXXXX                                                                                                                       2016-063215
                                                                                                                                               G. Allen
September 29, 2016

Dear Mr. XXXXXXXXXX:

Re:  Retiring Allowance – Paragraph 60(j.1) Rollover to RRSP

This letter is in reply to your February 12, 2016 letter, concerning the payment of a retiring allowance to you by a corporation in which you are XXXXXXXXXX shareholder and the subsequent rollover of the retiring allowance to your registered retirement savings plan (RRSP) in accordance with paragraph 60(j.1) of the Income Tax Act (the “Act”).

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in information circular (IC)70-6R6, Advance Income Tax Rulings and Technical Interpretations.  In this regard, we would refer you to paragraph 19 h., and paragraph 7 f. of Appendix A, in IC70-6R6.  However, we can provide you with the following general comments.

Our Comments:

The Canada Revenue Agency's general views regarding retiring allowances are contained in Interpretation Bulletin IT-337R4, "Retiring Allowances”.  The term "retiring allowance" is defined in subsection 248(1) of the Act, in general, as an amount received on or after retirement of a taxpayer from an office or employment in recognition of the taxpayer's long service or in respect of the taxpayer's loss of an office or employment.  Accordingly, to qualify as a retiring allowance the amount received must be received in respect of the taxpayer’s employment or position as an officer.  The term “office” is defined in subsection 248(1) of the Act to mean the position of an individual entitling the individual to a fixed or ascertainable stipend and includes, inter alia, the position of a corporate director.  It is a question of fact and a matter of law whether an employee/employer relationship exists or whether a taxpayer holds the position of an officer in a particular situation.  In order to determine whether an employee/employer relationship exists or whether a taxpayer is an officer of a corporation a review of all of the relevant facts and supporting documentation, e.g., employment contracts, agreements, etc., would be required.

If an employee or officer, who is also a shareholder, receives an amount as a retiring allowance on or after retirement or after a loss of employment and the amount is not received in recognition of long service as an employee or in respect of the loss of employment, the amount received will not by definition be a retiring allowance.  In these circumstances, in our view, the amount received by the shareholder may be a shareholder benefit and included in income pursuant to subsection 15(1).  This determination would be a question of fact.

An amount that qualifies as a retiring allowance must be included in the taxpayer's income by virtue of subparagraph 56(1)(a)(ii) of the Act in the year in which it is received.  Subject to certain limitations, the eligible portion of a retiring allowance may be transferred to the taxpayer’s RRSP on a tax-deferred basis.

The eligible portion of a retiring allowance for purposes of paragraph 60(j.1) of the Act is calculated as the sum of:

a)    $2,000 times the number of years before 1996 during which the taxpayer was employed by the employer or a person related to the employer; and

b)    $1,500 times
i)  the number of years before 1989 during which the taxpayer was employed by the employer or a person related to the employer, minus
ii) the equivalent number of years before 1989 in respect of which contributions to a pension plan or a deferred profit sharing plan by the employer or a person related to the employer vested in the taxpayer at the time the retiring allowance is paid.

For purposes of the above, “employed” means performing the duties of an office or employment.

In general, the deduction for the amount transferred to an RRSP is limited to the least of:

a)    the amount of retiring allowance included in the taxpayer's income for the year;

b)    the eligible portion of the retiring allowance, less all amounts deducted under paragraph 60(j.1) of the Act in respect of retiring allowances paid by the employer or a person related to the employer in the current or a previous year; and

c)    the total of all amounts paid by the taxpayer in the year or within 60 days after the end of the year to the taxpayer's RRSP,

to the extent such amounts were not deducted in computing the taxpayer's income for a preceding taxation year.

We trust that our comments will be of assistance to you.

Yours truly,

Lita Krantz, CPA, CA
for Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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