8 October 1996 Internal T.I. 9632316 - EBP CONVERSION TO 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 Department.

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

Principal Issues:

Professional athletes EBP proposal to change to RCA

Position:

Need more info.

Reasons:

1)plan may not be an RCA so change will not accomplish goal;

2)Trust may not permit change in trustees;

3)employee ability to direct change may indicate control of trust funds;

4)change may be an avoidance transaction where employee intends to emigrate.

								October 8, 1996

	HEADQUARTERS					HEADQUARTERS
	Reorganizations and				P. Spice
	  International Division			(613) 957-8953
	Attention:  Greg Middleton
								963231

Employee Benefit Plan Change to Retirement Compensation Arrangement

This is in reply to your request of September 13, 1996, to review the attached memorandum of August 28, 1996, from the XXXXXXXXXX Tax Services Office. In particular you asked us to review paragraphs 7 and 8 of the memorandum which purport to describe steps to be taken to cause an employee benefit plan ("EBP") to become a retirement compensation arrangement ("RCA"). The reason for taking the steps is to reduce the tax payable by

XXXXXXXXXX

The plan described in the memorandum is stated to be a salary deferral arrangement as defined in subsection 248(1) of the Income Tax Act (the "Act") but for the exclusion from that definition in paragraph (j) thereof. The plan is also excluded from the definition of an RCA in subsection 248(1) of the Act because, in accordance with paragraph (j) of that definition, it would be a salary deferral arrangement but for the exclusion in paragraph (j) of the definition "salary deferral arrangement" and in the case of a Canadian team, the custodian of the plan or arrangement carries on business through a fixed place of business in Canada and is licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as trustee (subparagraph (j)(ii) of the definition of RCA).

In order for the plan to become an RCA, therefore, it is intended that the employee direct the employer to transfer the funds to a new trustee who does not carry on business through a fixed place of business in Canada and/or is not authorized or licensed to carry on the business of offering its services to the public as trustee.

Without having access to the plan document or a description of the arrangement, it is difficult to confirm the possible tax consequences. There are various possibilities as follows.

1.The plan may not qualify as an RCA because it does not meet the definition in subsection 248(1), that being that the employer contributions were made in connection with "benefits that are to be or may be received or enjoyed by any person on, after or in contemplation of any substantial change in services rendered by the taxpayer, the retirement of the taxpayer or the loss of an office or employment of the taxpayer". It is possible that the plan was a salary deferral arrangement but for the exclusion in the "salary deferral arrangement" definition, but that it is not an RCA. Thus, a change in trustee will not cause it to lose its status as an EBP.

2.If it meets the RCA definition but for the exclusion in paragraph (j), the plan terms may prohibit the appointment of a trustee which does not meet the requirements in subparagraph (j)(ii) of the RCA definition. Thus, the proposed steps may not be possible.

3.The fact that, as indicated in the memorandum, it is the employee who causes the amendment may indicate that the employee has control over the disposition of the funds in the plan and that there is no trust arrangement at this point. This could indicate that the employee had constructive receipt of the amounts and should be taxed in accordance with paragraph 6(1)(g) of the Act. The Department's position on constructive receipt is set out in paragraph 10 of IT-502.

4.Lastly, the proposed transaction may be considered an avoidance transaction as described in subsection 245(3) of the Act. There will be a "tax benefit" as defined in subsection 245(1) of the Act since the employee will not be subject to tax under Part 1 of the Act on the fair market value of his interest under the EBP at the time he emigrates, but rather will be subject to lower rates and deferred tax under Part XIII of the Act as amounts are received out of the RCA. And there is no indication that the proposed steps are being undertaken for bona fide purposes other than to obtain the tax benefit.

In our view the transaction will result in an abuse having regard to the provisions of the Act read as a whole. The plans would normally be considered either salary deferral arrangements or RCAs but for the exemption provided in paragraph (j) of the respective definitions in subsection 248(1) of the Act. In most cases it is more advantageous for the employee to have a funded arrangement considered an EBP because a deferral of the employer's deduction under section 32.1 of the Act is generally less disruptive to the investment potential of the plan than the requirement to pay 50% refundable tax on contributions. The proposal to change trustees to cause the plan to become an RCA at a time when there will be no RCA tax consequences (if the full amount is distributed to the employee in the year) is clearly motivated by the discrepancy in tax rates applicable to emigrants and is abusive given the favourable tax treatment afforded professional athletes under the Act's scheme.

The foregoing comments are based on the description provided by the XXXXXXXXXX TSO. In order to select the most viable option from those listed above it would be necessary to review the plan documents and obtain more information concerning the circumstances surrounding the implementation of the original plan and the proposal.

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