18 March 2002 Internal T.I. 2001-0089547 - VOLUNTARY DISCLOSURE RCA

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 CCRA.

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

Principal Issues:

Do payments made to a former employee under an annuity contract purchased by the former employer represent payments from an RCA?

Position: Yes.

Reasons: Not an EBP or SDA.

									March 18, 2002

WINNIPEG TC						HEADQUARTERS
Gaby Lesperance						P. Kohnen, CMA
RCA Unit							(613) 957-2093

2001-008954

Voluntary Disclosure

This is in reply to your submission of June 20, 2001, in which you requested our views regarding the deductions taken by the subject corporation in respect of contributions to a retirement compensation arrangement ("RCA"). We have responded to you directly, rather than the client, as the waiver of interest and penalties, as discussed below, must be considered.

We have reviewed the documents submitted, including the summary of the relevant facts provided by the representative, as well as the enclosed copies of the Agreement and Release entered into by the employer and former employee and the Annuity Policy purchased by the employer. We have not attempted to verify the facts provided.

Based on our review of the above information, it appears that the employer did, by virtue of an arrangement (the Agreement and Release document), obligate themselves to provide benefits for the former employee, after his retirement. Furthermore, the employer did acquire an interest in a life insurance policy to fund those benefits. Accordingly, pursuant to paragraph 207.6(2)(a) of the Income Tax Act (the "Act"), the employer is deemed to be the custodian of an RCA and the interest in the life insurance policy is deemed to be subject property of the RCA, pursuant to paragraph 207.6(2)(b) of the Act.

Per paragraph (a) of the definition of "refundable tax" in 207.5(1) of the Act, 50% of the contributions to the RCA must be withheld and remitted by the custodian (the employer in this case). Note that paragraph 153(1)(p) of the Act requires a withholding on a contribution under an RCA. Paragraph 103(7)(a) of the Income Tax Regulations (the "Regulations") requires the contributing employer to withhold 50% of the contribution amount, which, pursuant to paragraph 207.6(2)(c) of the Act is deemed to be equal to twice the premium paid. Subsection 108(1) of the Regulations would require a remittance in respect of the initial premium paid in December 1997 by January 15, 1998.

The life insurance policy is not a prescribed annuity contract, as defined in subsection 304(1) of the Regulations, it is not an exempt policy pursuant to subsection 306(1) of the Regulations, nor is it a contract described in paragraph 12.2(1)(c) of the Act. Accordingly, subsection 12.2(1) of the Act applies to this contract such that the holder of the contract must include in income the amount by which the accumulating fund exceeds the ACB of the policy on the anniversary of the policy each year. Essentially, this excess is the income that has accrued in the policy in respect of the annuity.

Since the interest in the policy is deemed to be the subject property and such property is deemed to be the property of the trust and not to be the property of any other person pursuant to paragraph 207.6(1)(b) of the Act, the interest on the accumulating fund is income of the RCA. Such income interest is subject to the Part XI.3 tax in accordance with paragraph (b) of the definition of "refundable tax" in subsection 207.5(1). Where the RCA has no cash on hand to satisfy the payment of this tax, the custodian (employer) must remit the tax on its behalf.

It should be noted that where the employer pays the refundable tax on behalf of the RCA, we would consider this to be an additional contribution to the RCA, thus it would also be subject to refundable tax.

Pursuant to paragraph 20(1)(r) of the Act, the employer may deduct the amount of their contribution to the RCA in the taxation year in which the contribution was made. As noted above, an amount equal to twice the premium paid for the policy is deemed to be the amount contributed by the employer (this represents the actual premium and the refundable tax due in respect of the premium paid).

Pursuant to paragraph 207.6(2)(d) of the Act, any amount received in respect of the interest, and any amount received as refundable tax is deemed to be an amount received out of or under the RCA by the recipient. From 1999 onward, the insurance company has made the annual annuity payments to the employer, which has then paid an equal amount to the former employee. The representative has suggested that these payments to the employer must be included in its income pursuant to paragraph 12(1)(n.3) of the Act. For this to be true, the amount must be "received in the course of a business" and "out of or under a retirement compensation arrangement". As is noted above, paragraph 207.6(2)(a) deems the employer to be the custodian of the RCA. It seems reasonable to argue that the payment to the employer is simply a payment to the RCA custodian of a portion of the subject property, to enable the custodian to effect the payment to the former employee of his promised benefit. Neither of the two conditions above appear to be met; the amount is not received in the course of the employer's business, but rather, in its role as custodian of the RCA. Furthermore, the amount is not paid out of or under the RCA until it is paid by the employer, as custodian, to the former employee. Accordingly, the annual annuity payments should not be taxable in the hands of the employer, nor should the employer be entitled to deduct the amounts from their income.

The payments to the former employee, including the payment made directly to him in 1998, should be included in his income, pursuant to paragraph 56(1)(x) of the Act.

The custodian may elect under subsection 207.5(2) of the Act to deem an amount to be the refundable tax balance at the end of the current year. To be eligible for this election, all the subject property (if any) of the RCA must consist of only cash, debt obligations, and/or shares listed on a prescribed stock exchange. The interest in the life insurance policy constitutes a debt obligation, thus an election under subsection 207.5(2) is available here (assuming the annuity is the only subject property of the RCA). We have not reviewed the accuracy of the refundable tax calculations that were attached to the submission.

A person who has failed to withhold tax from a contribution to a retirement compensation arrangement (RCA) is liable to a penalty under subsection 227(8) of the Act and is required by subsection 227(8.3) to pay interest on the tax that was not withheld. In addition, the person is liable under subsection 227(8.2) to pay to Her Majesty an amount equal to the contribution.

In regard to the representative's request for a waiver of interest and penalties as a result of this voluntary disclosure, we note that the Canada Customs and Revenue Agency does have authority to waive penalty or interest, in accordance with subsection 220(3.1) of the Act. This request should be forwarded to the tax services office of the employer, for their consideration, in accordance with subsection 900(2) of the Regulations.

Subsection 227(8.2) of the Act allows the Minister to assess the person who was required under subsection 153(1) of the Act to withhold in respect of a contribution under an RCA and failed to do so. In this case, the employer is liable to pay an amount equal to the amount of their contribution to the RCA (the premium paid for the annuity). The Minister may raise such an assessment under subsection 227(10) of the Act. It should be noted that this amount is not a penalty, as the representative suggests on page 7 of their letter. This provision allows CCRA to enforce payment from the employer, rather than the RCA trust, and by treating the amount as a refundable tax (see paragraph 227(8.2)(b) of the Act), ensures that an amount no greater than the correct amount of refundable tax need be paid. Given that it is not a penalty, it may not be waived under the Voluntary Disclosures Program.

We trust that the above comments will be of assistance to you. Please do not hesitate to contact Phillip Kohnen at 957-2093 should you require further information.

Roberta Albert, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate