2001 Ruling 2000-0048643 - UNFUNDED SUP. PENSION PLAN SRA

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: 1)Will 56(2) or 56(4) apply where a spouse waives his or her right to amounts on the death of the participant and designates another person as the beneficiary? 2) Will the fact that a participant can choose to receive a lump sum or periodic payments affect whether the income is pension income for purposes of the Act? 3) Can we rule in respect of the notional crediting of amounts relating to service provided in XXXXXXXXXX ?

Position: 1)Question of fact. 2) No. 3) Yes.

Reasons: 1)We have never addressed the specific issue and the determination would have to be based on the facts. The final version of the plan eliminated this right. 2) We have ruled previously that these payments will constitute pension payments. 3) It is a proposed transaction and the notional crediting for prior service should not affect our rulings.

XXXXXXXXXX 							2000-004864

Attention: XXXXXXXXXX

XXXXXXXXXX, 2001

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Employer") (XXXXXXXXXX)

This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in subsequent letters and facsimiles and during our various telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the Employer, none of the issues involved in the ruling request

(i) is in an earlier return of the Employer or a related person,

(ii) is being considered by a tax services office or tax centre in connection with a previously-filed tax return of the Employer or a related person,

(iii) is under objection by the Employer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued to the Employer by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed plan and purpose of the proposed plan is as follows:

Facts

1. The Employer is a corporation established pursuant to the XXXXXXXXXX. The Employer is a private corporation exempt from income tax pursuant to paragraph 149(1)(d) of the Act. The Employer is not an agent of Her Majesty. The expression "private corporation" has the meaning assigned by subsection 89(1) of the Act.

The Employer's head office is located at XXXXXXXXXX. The Employer is located within the area served by the XXXXXXXXXX Tax Services Office located at XXXXXXXXXX

2. The Employer has established a comprehensive benefit program for its senior executive employees that includes an annual bonus plan, a long-term incentive plan, insurance, medical and disability programs.

Proposed Plan

3. The Employer intends to establish a registered pension plan (the "RPP") effective XXXXXXXXXX. The RPP will be a defined contribution pension plan. Employer and employee contributions will be computed based upon the aggregate of an employee's annual base salary plus any annual bonus payments to the extent the bonus payments do not exceed XXXXXXXXXX% of the annual base salary (subject to a cap of $XXXXXXXXXX per year) (hereinafter referred to as the "Total Covered Earnings"). Under the proposed terms of the RPP, an employee will be required to contribute annually XXXXXXXXXX% of his or her Total Covered Earnings. The Employer will contribute an annual amount equal to XXXXXXXXXX% of the employee's Total Covered Earnings. From time to time the dollar cap on the Total Covered Earnings will increase. However, the pension credit of any particular employee as a result of his or her participation in the RPP will not exceed the money purchase limit for the year.

4. The Employer also proposes to establish a notional defined contribution plan (the "Plan") for eligible executives. The Plan will be effective as of XXXXXXXXXX. The Plan is in addition to other benefit plans already established for its senior executive employees, as described in 2 above, and the proposed RPP described in 3 above.

5. An employee will be eligible to participate in the Plan only if the employee participates in the RPP and the employee's Total Covered Earnings exceed $XXXXXXXXXX per year, as adjusted from time to time to reflect changes in the money purchase limit for the year (the "Participant").

6. The Plan is not in lieu of or on account of any other compensation a Participant would otherwise be entitled to receive.

7. A notional contribution account (the "Notional Account") will be established in respect of each Participant.

8. Each Notional Account will be credited with an amount representing a notional contribution by the Employer equal to XXXXXXXXXX% of the Participant's Total Covered Earnings in excess of $XXXXXXXXXX. The crediting will not commence until a Participant's Total Covered Earnings in the year exceed $XXXXXXXXXX. For example, XXXXXXXXXX Total RPP contributions by the Participant and the Employer will equal XXXXXXXXXX% of the Covered Earnings (i.e., $XXXXXXXXXX) and Employer notional contributions to the Plan will equal XXXXXXXXXX% of the excess earnings (i.e., $XXXXXXXXXX) for a total amount of $XXXXXXXXXX in contributions and notional contributions to the two plans in respect of the Participant. While the Plan is effective XXXXXXXXXX, the Notional Accounts of two Participants will be credited with notional contributions and notional earnings on those contributions in respect of services rendered in XXXXXXXXXX.

9. The amounts credited to the Notional Account by the Employer will be notionally invested on behalf of the Participant. The Employer shall specify a list of notional investment choices. The notional investment choices offered to Participants will be limited to those investments offered under the RPP or such other investments that comply with the conditions set out in paragraph 8502(h) of the Income Tax Regulations (the "Regulations") or that are qualified investments for a registered retirement savings plan as set out in the Act and Regulations. Participants will be entitled to make new investment selections and alter existing investment selections at such other times as the Employer may decide. The notional investment of the notional contributions will be made in accordance with the existing investment elections specified by the Participant.

10. Periodically, the balance of a Participant's Notional Account will also be notionally credited with an amount representing earnings. The notional earnings amount will equal the net return that would have been earned during the preceding period on the notional investments selected by the Participant had those investments been purchased. The earnings will include accrued appreciation or depreciation in the value of the investment and interest, dividends or other income earned in the period.

11. At the sole discretion of the Employer:

(a) notional investment management expenses may be deducted on a basis consistent with the investment option selected by the Participant from each Notional Account in determining the notional earnings that will be credited to a Participant's Notional Account; and

(b) notional administrative expenses of any funding agent may be deducted on a basis consistent with the investment option selected by the Participant from each Notional Account in determining the notional earnings that will be credited to a Participant's Notional Account.

12. A Participant will be vested in his or her Notional Account upon completing XXXXXXXXXX years of continuous service with the Employer. A Participant will not be immediately entitled to any amounts under the Plan by virtue of becoming vested. The concept of vesting is relevant for determining entitlement when payments are otherwise made under the Plan, which will only be on the Participant's retirement, termination of employment or death or on the termination of the Plan. No amount will be payable under the Plan to a Participant who terminates employment, retires or dies prior to the completion of the vesting period.

13. A Participant may retire under the Plan upon attaining the normal retirement age as set out in the RPP. A Participant may also be able to retire earlier or later in accordance with the terms of the RPP, but not earlier than the date on which the Participant attains age XXXXXXXXXX, and not later than XXXXXXXXXX of the calendar year in which the Participant attains age XXXXXXXXXX.

14. Upon termination or retirement before age XXXXXXXXXX, a Participant shall receive a lump sum, net of the applicable withholding taxes, from the Employer equal to the vested balance in the Participant's Notional Account, determined as of the date of termination or retirement. The vested balance will equal the aggregate of the notional contributions and notional earnings credited to the Participant's Notional Account less any notional expenses deducted as described in 11 above. If the Participant terminates employment or retires on or after reaching age XXXXXXXXXX, the Participant may elect to receive payment of this amount, net of the applicable withholding taxes, in the form of a lump-sum cash payment or in equal, monthly installments over a period of XXXXXXXXXX years from the date of termination. The Participant will be required to elect the form of payment prior to the effective date of his or her termination or retirement. Whether the Participant elects to receive a lump-sum cash payment or monthly instalments, no payments will be made to or for the benefit of the Participant after the later of the last day of the calendar year in which the Participant attains XXXXXXXXXX years of age and the day that is XXXXXXXXXX years after the day of termination of the Participant's employment with the Employer.

15. If the installment payment option is chosen, the Participant's Notional Account balance will be reduced by the amount, prior to the applicable withholding taxes, of each installment paid by the Employer to the Participant. The balance remaining in the Participant's Notional Account will continue to be credited with earnings representing the total rate of return, including gains, losses and dividends on notional investments selected by the Participant less any notional expenses as described in 11 above. The Employer shall specify a list of notional investments available to a Participant during the installment period. Once payments have commenced under the Plan, Participants will be entitled to make investment selections from time to time in accordance with the rules and procedures established by the Employer.

16. Under the Plan, a Participant will also be able to designate a person to receive benefits in the event of his or her death or that such benefits may be paid to the Participant's estate as set out in the RPP (the "Beneficiary"). If a Participant has a spouse, as defined in the RPP (the "Spouse"), at the date of death, any payment on death, net of the applicable withholding taxes, will be made to the Participant's Spouse notwithstanding any Beneficiary designation to the contrary. However, the Spouse may waive payment of the benefit in the manner and form prescribed by the Employer in which case payment shall be made to the person or persons designated by the Spouse, provided the designated person is a dependent within the meaning of subsection 8500(1) of the Regulations (a "Dependent").

17. If a Participant terminates employment but dies before all the installments have been made, the vested balance to his credit in the Account will be dealt with as follows:

(a) If he or she has a Spouse on the date of death, the balance of the remaining installments, net of the applicable withholding taxes, shall continue to be paid to the Spouse. The Participant's Notional Account will be reduced to reflect the actual payments, prior to the applicable withholding taxes, made to the Spouse and credited with the earnings on the Notional Account balance as described in 14 above except that the Participant's Spouse will select the notional investments in the same manner as the Participant. With the consent of the Employer, the Spouse may elect to receive a lump sum payment, net of the applicable withholding taxes.

(b) If he or she does not have a Spouse or the Spouse has waived entitlement (see 16 above) the Beneficiary or the person designated by the Spouse, where that person is a Dependent, will receive from the Employer a lump sum cash payment, net of the applicable withholding taxes. The amount of the lump sum payment will be equal to the balance in the Participant's Notional Account, determined as of the date of death.

18. If a Participant dies prior to the commencement of payments under the Plan, the vested balance in the Account will be dealt with as follows:

(a) If the Participant has a Spouse at the date of death, the Notional Account balance will be payable to the Spouse. The Spouse may elect to receive payment, net of the applicable withholding taxes, either in the form of a cash lump sum, subject to the consent of the Employer, or monthly installments over a period of XXXXXXXXXX years from the Participant's date of death. If the monthly installment option is selected, the Participant's Notional Account will be reduced and credited as described in 15 above.

(b) If the Participant does not have a Spouse at the date of death or the Spouse has waived payment as described in 16 above, the Participant's Notional Account balance will be paid, net of the applicable withholding taxes, in a cash lump sum to the Participant's Beneficiary or the Dependent as designated by the Spouse.

19. On termination of the Plan, a Participant will receive from the Employer a cash lump sum payment, net of the applicable withholding taxes, equal to the balance of his or her Notional Account, determined as of the date of Plan termination. A Spouse who is in receipt of payments under the Plan will receive the remaining balance in the Participant's Notional Account in a lump sum cash payment, net of the applicable withholding taxes, on termination of the Plan. If the Plan is terminated, all unvested amounts credited to Participants Notional Accounts will immediately become vested.

20. The Employer will invest funds that, in aggregate, equal the amounts credited to the Participants' Notional Accounts. These funds will be invested in investments that mirror the investment options selected by the Participants from the list of investments that the Employer, in its discretion, deems appropriate. Such investments will be made from the general corporate funds of the Employer. These funds and any earnings will:

(a) legally belong to the Employer;

(b) will not be held in trust by the Employer or a party related to the Employer for or on behalf of a Participant;

(c ) will be subject to the claims of general creditors; and

(d) may be used by the Employer for other business purposes.

21. The Participants will not have any right to, or claim against, these funds.

22. The Employer will provide each Participant and/or their Beneficiaries with statements showing the amounts credited to the Participant's Notional Account (including earnings credited and expenses deducted, as described in 10 and 11 above) at least on an annual basis, on termination of employment, death, retirement and termination of the Plan.

23. All costs of establishing the Plan, including legal and accounting fees, and all ongoing administration costs of the Plan will be paid by the Employer.

24. The Employer will have the right to amend or terminate the Plan. No such amendment shall affect the amount credited to a Participant's Notional Account prior to the date of such amendment and no amount will be paid out prior to the dates specified in 14, 15, 16, 17, 18 and 19 above. The Employer has no intention of terminating the Plan, however, termination may occur as a result of events beyond the control of the Participants.

Purpose of the Proposed Plan

25. The purpose of establishing the Plan is to encourage the retention of senior executives of the Employer who contribute significantly to the achievement of the Employer's legislative mandate by providing the senior executives with an adequate level of retirement income.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed Plan and purpose of the proposed Plan, provided that the terms of the Plan are as described above and provided that the terms of the Plan are not amended as described in 24 above, we rule as follows:

A. The Plan will not constitute a retirement compensation arrangement, as that term is defined in subsection 248(1) of the Act.

B. The Plan will not constitute a salary deferral arrangement, as that term is defined in subsection 248(1) of the Act.

C. Subsection 12(4) of the Act will not apply to a Participant in the Plan to require any amount to be included in computing the Participant's income for a year as interest in respect of any entitlements the Participant may have under the Plan.

D. Each payment made by the Employer to a Participant, his or her Spouse, or Beneficiary, as the case may be under the Plan, will be required to be included in the income of the recipient in the year it is received as a superannuation or pension benefit pursuant to subparagraph 56(1)(a)(i) of the Act.

E. No amount will be included in the income of a Participant under subsection 5(1) of the Act, paragraph 6(1)(a) or subparagraph 56(1)(a)(i) of the Act as a result of, in and by itself, the Participant's participation in the Plan, other than as indicated in ruling D. For greater certainty, the payment of Plan expenses by the Employer will not result in an amount being included in the income of a Participant under subsection 5(1) or section 6 of the Act.

The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on the Canada Customs and Revenue Agency provided that the Plan is implemented by XXXXXXXXXX.

The above rulings are based on the draft of the Plan, the terms of which are described in 3 to 24 above, that was submitted to us. Any substantive difference between this version and the final version of the Plan would invalidate the rulings provided.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate