CRA finds that post-retirement benefits paid directly by the employer under a SERP did not generate refunds of the Part XI.3 tax paid in connection with the RCA trust established to pay related LC fees

Payments of the promised benefits under a supplemental executive retirement plan were secured through an LC provided by a bank, with the employer funding the annual LC fees by making contributions to a trust, which then paid the fees. In order to fund the Part XI.3 tax, those contributions were grossed-up, and with such tax being kept track of in the “refundable tax” in respect of this “RCA trust.”

In accordance with the terms of the SERP, the employer paid post-retirement benefits directly to the retired employees. In finding that these did not qualify as distributions under the retirement compensation arrangement (“RCA”) as per para. (c) of the s. 207.5(1) “refundable tax” definition – so that no refund of the refundable tax was generated - CRA stated:

[A]n amount is not paid as a distribution under the RCA unless the amount is paid from property held in connection with the RCA. [Here] the amounts of the direct payments made by the Employer to retired employees of post-retirement benefits in accordance with the Plan are not amounts paid as distributions under the RCA and would not be taken into account under paragraph (c) of the definition.

Neal Armstrong. Summary of 18 May 2017 CLHIA Roundtable, Q.3, 2017-0692331C6 under s. 207.5(1) - “refundable tax” – para. (c).