2004 Ruling 2004-0085591R3 - Supplemental Pension Arrangement

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.

Principal Issues: Is the supplemental pension plan an SDA or an RCA?

Position: No.

Reasons: The plan is an unfunded arrangement to provide pension benefits that are supplementary to the benefits provided under the employer's RPP. While funds may be set aside and invested to pay for benefits under the plan, the funds will remain available to the general creditors of the employer.

XXXXXXXXXX 2004-008559

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX (the "Employer") (Account XXXXXXXXXX)

This is in reply to your letters of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above-named taxpayer.

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

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

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

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

(iv) before the courts, or

(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (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 the purpose of the proposed plan is as follows:

Definitions and Abbreviations

"Beneficiary" means a person designated by a Member pursuant to the terms of the proposed XXXXXXXXXX.

"Board of Governors" means the Board of Governors of the XXXXXXXXXX.

"Employer" means XXXXXXXXXX.

"Member" means an employee who contributes to the registered pension plan of the Employer at any time after the effective date of the Employer's Supplemental Pension Arrangement.

"Plan" means the proposed XXXXXXXXXX.

"RPP" means the XXXXXXXXXX.

Relevant Facts

1. The Employer files its tax returns at the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Tax Services Office.

2. The Employer presently maintains an RPP for its employees. The RPP is a defined contribution pension plan. Members' contributions represent XXXXXXXXXX% of pensionable earnings up to the Canada Pension Plan yearly maximum pensionable earnings ("CPP YMPE") and XXXXXXXXXX% of pensionable earnings in excess of the CPP YMPE. The Employer's contributions represent XXXXXXXXXX% of pensionable earnings up to the CPP YMPE and XXXXXXXXXX% of pensionable earnings in excess of the CPP YMPE.

3. The Act and Regulations limit the total contributions to the RPP that the Employer and Member can make to the RPP.

Proposed Transactions

Subject to the receipt of a favourable advance income tax ruling from the Canada Revenue Agency (the "CRA"), the Employer will establish a Plan for the benefit of certain employees affected by the RPP contribution limits set out in the Act. Significant terms of the Plan are as follows:

4. An employee ("Employee") of the Employer who contributes to the RPP at any time after the effective date of the Plan will become a Member as of the first day of the biweekly pay period in the calendar year in which the aggregate of the contributions required to be made to the RPP by the Employee and by the Employer first equals or exceeds the maximum annual amount prescribed under the Act.

5. Accounts will be established for individuals who are Members of the Plan.

6. A Member's account will be credited with credits. The Employer will determine the credit under the Plan for a Member for each biweekly pay period in which the Employer's contribution to the RPP for that biweekly pay period for the Member is reduced or eliminated as a result of the application of the maximum annual limit on the aggregate of such contributions by the Member and the Employer prescribed under the Act.

7. The annual amount of the credit will be the amount that the Employer would be required to contribute to the RPP on behalf of the Member based on the Member's pensionable earnings as if the Act's maximum limit on the aggregate of required contributions to the RPP by the Employer and the Member did not apply, less the amount of any Employer required contributions to the RPP made on behalf of the Member, based on the Member's earnings as defined in the RPP. For greater certainty, the amount of credit for a bi-weekly pay period may be equal to but not less than zero. All credits will be credited each biweekly pay period to the Members' accounts as stipulated in the terms of the Plan.

8. The account of a Member will continue to be maintained until all payments to which the Member is entitled have been made or the Member forfeits any entitlement to benefits due to the Member's retirement, death, or termination of employment prior to his or her vesting date, as set out in the terms of the Plan. The vesting date means the date the member has been a member of the RPP for a continuous period of XXXXXXXXXX years, or the Member's normal retirement date, as defined under the Plan, if earlier.

9. No credits will be credited to the Member's account under the Plan for periods subsequent to the Member's retirement, termination or death.

10. No entitlement will be payable under the Plan before a Member becomes entitled to payment from the RPP due to retirement, termination of employment, or death.

11. If a Member retires, dies, or terminates his or her employment after his or her vesting date, the member will be entitled to receive his or her vested entitlement in accordance with the terms of the Plan.

12. A Member may designate a person to whom, in the event of the death of the Member, entitlements under the Plan will be paid. A Member may revoke or alter this designation at any time.

13. Subject to (18) below, the Employer will pay the benefits under the Plan to the Member or the Member's designated Beneficiary in annual instalments over a period of XXXXXXXXXX years.

14. A Member who retires or terminates employment, or in the case of a Member who dies before retirement, the designated Beneficiary may elect to receive the Member's benefits in annual instalments over a period of not greater than XXXXXXXXXX years, or in a lump sum; or to defer the payment of the lump sum or the commencement of the instalments to a date not later than the first day of the month following the Member's XXXXXXXXXX birthday (in the case of a deceased member, assuming the Member survived until such date).

15. The amount of each annual instalment to a Member will be the quotient obtained by dividing the balance in the Account of the member at the end of the month immediately preceding the instalment by the number obtained when the number of years for which instalments have previously been made to the Member is subtracted from the number of years over which annual instalments are to be made.

16. Subject to (21) below, if a Member terminates employment before age XXXXXXXXXX and elects to receive annual instalments, the earliest commencement date for the annual instalments will be age XXXXXXXXXX.

17. Lump sum payments will be made or annual instalments will commence on the later of the first day of the month following the date on which the Member retires, terminates or dies, or a later date as elected by the Member or the designated beneficiary (subject to 14 above). Succeeding annual instalments will be made on the anniversary date of the first instalment.

18. If a Member who has retired or terminated employment dies before receiving all the Member's vested entitlement, the Employer will pay the remainder of the Member's vested entitlement to the Beneficiary in the same manner in which it was payable to the Member.

19. If a Member has not designated a Beneficiary under the Plan or if the Beneficiary has predeceased the Member and no alternate Beneficiary is eligible to receive a benefit on the death of the Member, the Employer will pay the Member's vested entitlement to the Member's estate as a lump sum.

20. If a Member retires, dies, or terminates his or her employment prior to reaching his or her vesting date, the Member will not be entitled to any benefit under the Plan. Such person will no longer be a Member of the Plan.

21. The Employer may, at any time, supplement, modify, amend or terminate the Plan, provided that no such supplementation, modification, amendment or termination shall affect the entitlement of any Member accrued under this Plan prior to the effective date of such supplementation, modification, amendment or termination. Any such supplementation, modification, or amendment to this Plan will meet the requirements of the Act.

22. The Employer will fund such retirement benefits by making contributions on behalf of individual Members of the Plan which are accumulated in accounts maintained in respect of each Member. The accounts under the Plan will be a general liability of the Employer. All assets held for the purposes of the Plan will be available for the general creditors of the Employer. The Employer will be the sole legal and beneficial owner of all assets set aside for purposes of the Plan and the assets will be the sole property of the Employer.

23. The Plan will be administered by the Employer in accordance with the laws of the Province of XXXXXXXXXX.

24. The assets of the Plan are not in a trust fund.

25. The assets of the Plan are invested by the Employer in a pooled account, but are not earmarked in the name of any individual member.

26. The Plan is a defined contribution or money purchase type plan.

27. The assets held for the purposes of the Plan may be commingled with other assets of the Employer. No assets will be set aside or earmarked in the name of a Member and no Member will have any direct claim against any assets held for purposes of the Plan.

Purpose of the Proposed Plan

The purpose of the Plan is to provide supplemental retirement benefits to Members of the RPP whose retirement benefits would otherwise be restricted as a result of maximum pension limits imposed by the Act and Regulations.

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, and provided that the terms of the Plan are as described above, 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. 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 a Member or his or her designated 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 a Member under subsection 5(1) of the Act or paragraph 6(1)(a) or subparagraph 56(1)(a)(i) of the Act as a result of, in and by itself, the Member's participation in the Plan.

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

The above advance income tax rulings, which are based on the Act and Regulations in their 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 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch