2020-0868851E5 Bona Fide Termination of Employment

Principal Issues: (1) What factors would be considered in determining whether a termination from employment is a bona fide termination in the context of a registered pension plan? (2) Is the guidance provided in Income Tax Folio S2-F1-C2, Retiring Allowances, with respect to the meaning of retirement and loss of employment applicable for determining whether a bona fide termination has occurred in the context of an RPP?

Position: (1) Question of fact. (2) Not necessarily.

Reasons: (1) Whether there is a bona-fide termination of employment is fact specific and dependent on the specific circumstances of the taxpayer. (2) The Guidance in S2-F1-C2 is provided in the specific context of the definition of "retiring allowance".

Author: Koh, Kah Foo
Section: 147.1

XXXXXXXXXX
                                                                                                                             2020-086885
                                                                                                                             Kah Foo Koh

January 20, 2021

Dear XXXXXXXXXX:

Re:  Bona Fide Termination of Employment

This is in reply to your letter dated October 30, 2020, in which you requested our guidance on determining whether the employment relationship between an individual and that individual’s employer has been effectively terminated (referred to as a “bona fide termination” in your letter) in the context of registered pension plans (“RPPs”).  You also asked whether the guidance provided in Income Tax Folio S2-F1-C2, Retiring Allowances (the “Folio”) on ascertaining when there is a retirement or the loss of employment can be extrapolated to, or used in the context of, RPPs.

You referred to the fact that RPPs typically contain provisions that only permit members to access benefits under the plan (e.g., commence receipt of a pension or be eligible to transfer the commuted value of their earned pension entitlement out of the pension plan) after a member is no longer an employee of the sponsoring employer either through termination, resignation, or retirement.  Furthermore, you also stated that RPPs are generally subjected to pension standards legislation that requires pension assets to be locked-in and used solely for retirement purposes, with certain limited exceptions.  Thus, it is generally important that a member ceases to be an employee of the sponsoring employer prior to receiving any pension benefits. 

However, you stated that there may be situations or arrangements where it is not entirely clear if there has been a bona fide termination of employment.  Your letter provided the following examples:

(a)   An employee resigns from employment and is rehired into the same position with the same employer (or a related employer) but in a different location with a 6 month break in service.

(b)   An employee resigns from employment and is rehired into a different class of employment (e.g. union to management) with the same employer (or a related employer).

(c)   An employee resigns from employment and is rehired to work for the same employer (or a related employer) through a union hiring hall. The hiring hall operates such that the employer advises the union of the requirements of a position and the union refers a suitably qualified individual.

(d)   An employee resigns from employment and is informed that they may reapply in the future without any guarantee of rehire. The employee is subsequently rehired within a year. The employer’s standard policies permit the period of prior service to be considered for vacation, post-retirement benefits eligibility, seniority and similar employment benefits enjoyed during the second period of employment where there is less than a one year period between the resignation and rehire.

In the event a member receives pension benefits under a RPP following a termination of employment that is not a bona fide termination, you contend that there is a risk that the RPP would not be administered in accordance with its terms as registered, as required under subsection 147.1(11) (footnote 1) .

Our Comments

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 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

In general, whether there is a bona fide termination of the employment relationship between an individual and that individual’s employer is a question of fact to be determined based on the circumstances of each case. Additionally, the guidance in the Folio is provided in the context of the definition of “retiring allowance” in subsection 248(1) and may not necessarily be applicable in the context of RPPs.

We note that this matter is primarily of relevance to the application of pension standards legislation, as the registration conditions for RPPs do not require members to have terminated employment before they can access their pension benefits. Accordingly, you may wish to seek more detailed guidance from the relevant pension regulator.

We trust our comments will be of assistance.

Yours truly,

Dave Wurtele
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Unless otherwise stated, all statutory references in this document are to the Income Tax Act (the “Act”).

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