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:
Is the Supplementary Retirement Arrangement (unfunded pension plan) an SDA or an RCA?
Position: No
Reasons:
It is an unfunded arrangement to provide pension benefits that are supplementary to the benefits provided under an RPP. There is no trust set up.
XXXXXXXXXX 2001-011258
XXXXXXXXXX, 2002
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, requesting an advance income tax ruling for the above-noted taxpayer.
Our understanding of the facts, proposed plan and purpose of the proposed plan is as follows:
FACTS
1. XXXXXXXXXX (the "Employer") deals with the XXXXXXXXXX Tax Services Office of the Canada Customs and Revenue Agency (the "Agency"). Its taxpayer number is XXXXXXXXXX.
2. The Employer is a corporation incorporated under the name of XXXXXXXXXX . Its address is XXXXXXXXXX.
3. The Employer is a registered charity exempt from tax under paragraph 149(1)(f) of the Income Tax Act (Canada) (the "Act") (registration # XXXXXXXXXX).
4. The Employer has established a pension plan for full-time employees of the Employer (the "RPP") with effect from XXXXXXXXXX. The RPP is a registered pension plan, as defined in subsection 248(1) of the Act, under the Agency registration # XXXXXXXXXX. The RPP is a defined benefit plan which currently has a significant surplus.
5. The RPP provides benefits to all full-time employees of the Employer. The pension formula under the RPP is XXXXXXXXXX% of the average earnings for the XXXXXXXXXX years during which the member's earnings are the highest multiplied by credited service.
6. XXXXXXXXXX.
7. On XXXXXXXXXX, the Employer, XXXXXXXXXX entered into Supplemental Retirement Plan Agreements (the "SRP Agreements"). The SRP Agreements provide for the establishment of a supplemental retirement plan for eligible full-time employees of the Employer and for the taking of Employer contribution holidays under the RPP.
8. The RPP currently provides for a mandatory minimum Employer contribution equal to the employee's contribution. Therefore, the RPP has to be amended to provide for an express permission to take Employer contribution holidays.
PROPOSED TRANSACTIONS
9. Subject to the receipt of a favorable advance income tax ruling from the Agency, the Employer will establish the Supplemental Retirement Plan for Full-Time Employees of the Employer (the "Plan").
10. The Plan will provide lifetime retirement benefits to active members of the RPP who terminate employment, die, become disabled or retire on or after XXXXXXXXXX (the "Eligible Members"). An Eligible Member or, as the case may be, the Eligible Member's spouse or assigns, shall be entitled to receive, with respect to any benefit payable under the RPP, a benefit calculated based on an annual pension benefit equal to the result of A minus B where:
A is the annual pension benefit of the Eligible Member determined under the provisions of the RPP without regard to the income tax maximum (calculated under subsection 8504(1) of the Income Tax Regulations);
B is the annual pension benefit of the Eligible Member determined under the provisions of the RPP but with regard to the income tax maximum.
11. The additional benefits provided under the Plan shall be subject to the same terms and conditions and are payable at the same time and in the same form as those applicable to the corresponding benefit under the RPP, except that:
- in the case of termination of employment prior to the early retirement date under the RPP, any commuted value of the benefit to which the Eligible Member is entitled shall be paid to the Eligible Member immediately in the form of a taxable lump sum;
- the Employer reserves the right to commute the payment of monthly pensions of $XXXXXXXXXX or less;
- there shall be no partition of benefits upon cessation of a conjugal relationship or marriage breakdown.
12. The Employer will use its operating funds to pay the required benefits to the Eligible Members as required under the Plan. However, for financial accounting purposes, the Employer shall set aside funds in a special purpose fund (the "Fund") to fund its liabilities under the Plan and pay for the administration expenses of the Plan. At all times, the Employer will retain ownership of all of the funds set aside in the Fund. The Employer will not contribute amounts to a trust or to any other person or legal entity in respect of the Plan and the Employer will ensure that the assets set aside in the Fund shall not constitute trust property. The funds held in the Fund will not be subject to the direct claim of any Eligible Members that may receive benefits under the Plan and the funds will be subject to the claims of the Employer's creditors in accordance with applicable bankruptcy legislation in the event of the Employer's receivership, bankruptcy or wind-up. In order to maximize its return on the funds held in the Fund, the Employer will seek the advice of a third party investment manager when making its' investment decisions.
13. The funds to be set aside by the Employer each year are those that the Employer would normally contribute to the RPP if it were not for the surplus in the RPP and the Employer contribution holiday as provided for in the text of the RPP. Under the SRP Agreements and the RPP, the Employer is entitled to take contribution holidays in amounts such that the Fund becomes, as quickly as possible, and remains, sufficient to cover the liabilities and expenses of the Plan.
PURPOSE OF THE PROPOSED TRANSACTIONS
14. The purpose of the proposed transactions is to provide supplemental retirement benefits to Eligible Members of the RPP that have their RPP retirement benefits restricted as a result of limits imposed by the Act and Regulations. The Employer will fund such retirement benefits by setting aside funds that it would normally have to contribute to the RPP if it were not for the surplus in the RPP.
15. To the best of your knowledge and the knowledge of the Employer, none of the issues involved in this request for advance income tax rulings are:
a. in an earlier return of the Employer or a person related to the Employer;
b. being considered by a tax services office or taxation centre in connection with a previously filed return of the Employer or of a person related to the Employer;
c. under objection by the Employer or by a person related to the Employer;
d. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; nor
e. subject to a ruling previously issued by the Income Tax Rulings Directorate to the Employer.
RULINGS GIVEN
Provided that the preceding statement of facts and the description of the proposed transactions are correct and constitute a complete disclosure of all the relevant facts and terms of the proposed Plan, and provided the Plan is established as proposed, we rule as follows:
A. The Plan will not constitute a salary deferral arrangement as that term is defined in subsection 248(1) of the Act.
B. Provided that the Plan does not result in the creation of a trust, the Plan will not constitute a retirement compensation arrangement as that term is defined in subsection 248(1) of the Act.
C. Every payment made by the Employer to an Eligible Member or his or her beneficiary, as the case may be, under the terms of the Plan, will 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.
D. No amount will be included in the income of an Eligible Member under subsection 5(1) of the Act or paragraph 6(1)(a) of the Act as a result of, in and by itself, the Eligible Member's participation in the Plan.
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 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the Plan is implemented by XXXXXXXXXX.
This letter does not express or imply, and should not be construed as expressing or implying any approval in respect of the proposed amendments to the RPP. This confirmation or approval can only be given by the Registered Plans Directorate or the corresponding provincial pension commission.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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