8 July 2013 External T.I. 2012-0444981E5 - Deductibility of Employee RCA Contributions

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: Whether employee contributions to a SERP-RCA on conversion of past service benefits from a defined contribution basis to a defined benefit basis satisfy the condition in paragraph 8(1)(m.2) that the contribution be required as a condition of employment.

Position: Question of fact, but likely in this case.

Reasons: Although there is an elective element, it is not sufficiently connected to the contribution. Participation in the SERP-RCA is directly linked to the conversion and on-going participation in the RPP and any election made for the purposes of the RPP automatically applies for the purposes of the RCA.

XXXXXXXXXX

2012-044498
D. Wurtele

July 8, 2013

Dear XXXXXXXXXX:

Re: Deductibility of Employee RCA Contributions

This is in reply to your e-mail concerning the deduction in paragraph 8(1)(m.2) of the Income Tax Act (the "Act") for employee contributions to a retirement compensation arrangement ("RCA").

Background

The employer sponsors a registered pension plan ("RPP"). In XXXXXXXXXX, the RPP was amended to close the existing defined benefit ("DB") provision to new members and to add a new defined contribution ("DC") provision. Existing members were given the option to either remain in the DB provision for future service, or retain their accrued defined benefits and accrue future benefits under the DC provision. The employer also sponsors two non-registered supplemental employee retirement plans (SERPs), a DB SERP and DC SERP, which provide "top-up" benefits to higher income employees whose benefits under the RPP are limited to the maximum pension/contribution limits under the Act. XXXXXXXXXX.

The employer proposes to amend the RPP to re-open the DB provision and give existing members the right to make a one-time election to accrue future benefits on a DB basis, XXXXXXXXXX. Any benefits in excess of the maximum income tax limits will be provided under the DB SERP. Members XXXXXXXXXX, will also be given the right to make a one-time election to convert their RPP past service from DC to DB, subject to certification of the past service pension adjustment.

The RPP past service election will automatically apply for the purposes of the SERP. A member who makes the election and who is also a member of the DC SERP will be required, as a condition of the conversion, to contribute to the RCA XXXXXXXXXX (the "Employee RCA Contribution"). The member's credited service under the DB SERP will then be re-instated to the same date used for the crediting of the past service under the DB provision of the RPP. XXXXXXXXXX.

You have asked that we confirm that an Employee RCA Contribution made by an eligible member XXXXXXXXXX will be considered to satisfy the condition of employment requirement in paragraph 8(1)(m.2) of the Act and therefore deductible in computing the employee's income (assuming all of the other conditions in that paragraph are met).

Our Comments

Paragraph 8(1)(m.2) of the Act allows a deduction for contributions made by an employee to an RCA provided certain conditions are met. One of the conditions is that the employee be required by the terms of their employment to make the contributions.

It is a question of fact whether an employee contribution to an RCA is required as a condition of employment. Normally, we would not consider employee contributions that are elective or voluntary in nature to satisfy this condition, such as, for example, contributions made pursuant to the terms of an RCA that permit employees who are re-hired to elect to buy-back their previously commuted RCA benefits. Nonetheless, the condition may be met in circumstances where the elective element is not sufficiently connected to the contribution. This would be the case, for example, where an employer gives new employees the option of participating in a contributory RPP/SERP arrangement. Once an employee chooses to participate, it becomes a condition of employment for the employee to make contributions to the RPP and the RCA established by the SERP if required to do so under the terms of the RPP and SERP.

In our view, the Employee RCA Contributions described above are more analogous to the contributions described in the second example than those described in the first example and thus we would expect that they would be considered required by the terms of the member's employment for the purposes of paragraph 8(1)(m.2) of the Act.

While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the Canada Revenue Agency in respect of any particular situation.

Yours truly,

Mary Pat Baldwin, CPA, CA
Manager
Deferred Income Plans Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch