CRA rules on the use of surety bonds rather than LCs to secure SERP benefits

A Company determined that, rather than securing a non-registered supplemental employee retirement plan (“SERP”) for its senior employees using letters of credit, there would be lower fees to instead arrange for surety bonds to be delivered to the trustee for the security arrangements by insurance companies. In addition, “surety bonds will not reduce the Company’s borrowing capacity (in contrast to LOCs).”

This entails essentially following the same arrangements as where LCs are used. Every time a surety bond is required to be issued, renewed or replaced, the Company will be required to pay the surety fee to the trustee under a new trust, and the Company will make a corresponding payment to the Receiver General equal to the surety fee on account of the refundable tax payable under Part XI.3. The trustee will, in turn, pay the surety fee to the insurance company for such issuance, renewal or replacement of a surety bond.

CRA ruled that the amounts paid to the trustee by the Company and the amounts remitted to the Receiver General by the Company, will constitute contributions made to the retirement compensation arrangement, and will be deductible by the Company to the extent permitted by s. 20(1)(r) for the taxation year in which they are made.

Neal Armstrong. Summary of 2018 Ruling 2017-0720901R3 under s. 207.5(1) – refundable tax – para. (a).