"Retiring allowances" are not novel in taxation and
employment law. Defined in the Income Tax Act
(Canada)1 and explained in CRA
publications2, "retiring allowances" are
routinely treated as a tax effective approach to severance
obligations on termination of employment or "loss of
office". Yet, with the ability to also grant a retiring
allowance in recognition of "long service", they are
becoming more prevalent when transitioning an executive out of an
organization either at the time of termination or retirement.
As part of an executive exit strategy, retiring allowances can
offer an employer greater flexibility than many other more
conventional arrangements. Although the most common application of
a retiring allowance is the payment of an additional sum to an
employee upon the termination of their employment relationship
(e.g., severance), it is also possible for an employer to pay a
retiring allowance solely in recognition of long service on
departure. This can be done either as an established contractual
obligation or simply as an ad hoc payment at the time of
an executive's departure.
The treatment of a retiring allowance as a contractual
obligation between an employer and an executive is not widely
utilized. However, if employed, retiring allowance obligations may
be evidenced through specific contractual terms or an internal
policy that clearly establish when a payment will apply:
retirement, specific circumstances of termination, termination due
to change of control, etc.
In recognition of long service, the case law is far from
conclusive in establishing guidelines for what actually constitutes
"long service". Although the CRA position is that long
service is "usually considered"3 to reference
the employment term with a particular employer or affiliate, it is
suggested that an employer could take into consideration the
cumulative industry employment of an executive in determining an
appropriate payment. As the quantum of the retiring allowance must
be reasonable, it is necessary to define, within the parameters of
the contract or internal policy, what service conditions an
executive must satisfy in order to be entitled to payment. In the
simplest terms, the contract or policy must specify when payment of
the retiring allowance becomes a right accrued to the executive
through, for example, the completion of a specified period of
While the promise of a retiring allowance as a contractual or
policy obligation creates certainty for the parties, both in amount
and payment method, there is no requirement that it must be a
formal arrangement. From the perspective of the employer, a
retiring allowance may also be a gratuitous payment offered to a
departing long service executive as a means of, for example,
increasing retirement income outside of a registered or
supplemental pension arrangement.
The benefit of utilizing a retiring allowance as an additional
form of compensation is that it can be highly beneficial from a tax
perspective. For instance, retiring allowances are one of the few
payments, in the employment context, that are permitted to be paid
over several years.
This also allows the employer to spread out the cost of the
payment obligation. However, it is a question of fact considered by
the CRA whether incremental payments are truly a retiring
allowance. As such, if challenged, the executive must be able to
establish that all other ties indicative of an employment
relationship have been extinguished.
Historically, retiring allowances have generally been paid to
employees in conjunction with the termination of employment or
"loss of office". However, the definition of
"retiring allowance" contemplates payments in the
mutually exclusive circumstances of both a "loss of
office" and "long service" recognition thereby
broadening the applicability of such a payment. While it is not
advocated that payment of a retiring allowance become a matter of
course, it is suggested that if an organization is considering
transitioning an executive out of office, either by way of
termination or retirement, offering the option of a retiring
allowance may provide a flexible form of compensation not
previously employed in this context.
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A former teacher at Bodwell High School has learned a valuable lesson from the B.C. Human Rights Tribunal— it is not discriminatory for an employer to offer child-related benefits to only employees with children.
We are now beginning to see reported cases involving charges and subsequent fines laid against employers for failing to provide information, instruction and supervision to protect a worker from workplace violence.
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