23 April 2009 External T.I. 2009-0306371E5 - Determination of SERP benefits

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: Can an employee forgo the payment of a retiring allowance and as a consequence be credited with pensionable service under an unfunded SERP such that the employee will receive increased benefits under the SERP

Position: No.

Reasons: The SERP would not reflect provisions that are normally found in a pension plan or a registered pension plan since it is generally not considered appropriate to provide benefits under a pension for periods of service that do not exist. Furthermore, the SERP would not reflect the same terms of any underlying RPP. Accordingly, the Plan would not be excluded from the salary deferral arrangement rules.

If a retiring allowance is payable as a result of the involuntary termination of an employee and the employee directs the amount to be paid into a SERP, it is arguable that the employee has constructively received the retiring allowance at the time the amount is paid into the SERP.

XXXXXXXXXX 						2009-030637
							Wayne Harding
April 23, 2009

Dear XXXXXXXXXX :

Re: Use of severance benefits to provide additional pensionable
service under a Supplemental Employee Retirement Plan (SERP)

This is in reply to your letter of January 14, 2009, wherein you requested a technical interpretation with respect to a proposal to provide additional benefits to a terminating employee under a SERP in lieu of the payment of severance benefits.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website.

While we are not prepared to comment on your specific proposal, we are prepared to provide the following general comments which may be of assistance.

The CRA has previously stated that a SERP will not be treated as a salary deferral arrangement (an "SDA") where the SERP has the characteristics of an unregistered or supplementary pension plan and the amounts that may be paid out of or under the SERP can be considered reasonable superannuation or pension benefits. Where a plan provides benefits that are not reasonable superannuation or pension benefits the CRA is of the view that an SDA will exist.

The CRA generally takes the position that supplementary pension benefits payable out of or under a SERP will be considered reasonable if:

• the terms of the SERP are substantially the same as those of the registered pension plan ("RPP") that applies to the same beneficiaries to whom the arrangement applies, and
• the benefits that can be paid under the SERP are the same as the benefits that would have been paid under the RPP but for the defined benefit or money purchase limit.

Where a specific SERP provides benefits that are not the same as those provided under the RPP, or are greater than those that could be provided under the RPP (but for the defined benefit or money purchase limit) then the terms of the SERP and any other relevant information must be considered to determine if the benefits are reasonable in order to ensure that the SERP is not an SDA.

Under the Income Tax Regulations (the "Regulations") applicable to an RPP, pensionable service generally includes the accumulated period or periods of time during which an employee renders employment services to an employer and, where applicable, certain other specific periods including, for example periods of temporary absence and periods of disability. Otherwise, there are no provisions under the Regulations that allow employees to include phantom periods of time in the determination of pensionable service. It is our view that pensionable service must be calculated in a similar manner for a SERP. Accordingly, in our view where an employee is given the option of using his severance to acquire additional pensionable service under a SERP, the plan would no longer be excluded from the SDA definition and the arrangement would be an SDA.

We trust that our comments will be of assistance to you.

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch