21 March 2000 Income Tax Severed Letter 2000-0010186 - EMPLOYEE BENEFIT PLAN

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: Is a particular arrangement an employee benefit plan or an employee trust? Question is whether or not withholding of tax is required on a payment to a beneficiary.

Position: Arrangement is an employee benefit plan.

Reasons: There is nothing in the trust document to indicate that the arrangement is an SDA or an RCA. Since the trust was created in XXXXXXXXXX and did not elect to be an employee trust in its return of income for its XXXXXXXXXX taxation year, it cannot now elect to be an employee trust (paragraph (c) of the definition of "employee trust" in 248(1)).

			March 21, 2000

	HEADQUARTERS	HEADQUARTERS
	Revenue Collections Directorate	Income Tax Rulings
			  Directorate
	Attention:  Lloyd MacKay	G. Kauppinen
			957-8971

2000-001018

Trust Agreement

This is in reply to your facsimile dated February 24, 2000, wherein you requested our comments regarding the terms of a Trust Agreement.

Facts

The Trust Agreement was made XXXXXXXXXX between the "Company" and the "Trustees". The "Trust" was settled at that time "for the benefit of Key Employees under the Plan" with a $XXXXXXXXXX contribution by the Company.

No further contributions were made by the Company to the Trust and no distributions were made to any employees of the Company until XXXXXXXXXX when the Company contributed an (unspecified) amount to the Trust and that amount was immediately paid by the Trust to a (key?) Employee before the end of XXXXXXXXXX.

The Employee intends to report the receipt from the Trust as taxable income on his XXXXXXXXXX T1 Income Tax Return.

The Trust has never filed a T3 Income Tax Return ("T3") since its creation in XXXXXXXXXX but intends to file a T3 for its XXXXXXXXXX taxation year.

Your Query

You have asked our opinion as to the status of the Trust for the purpose of any requirement by the Trustees to withhold and report income tax on the distribution in XXXXXXXXXX to the Employee.

Our Comments

There is nothing in the Trust Agreement which indicates that the Trust would constitute a "salary deferral arrangement" or "retirement compensation arrangement" as defined in subsection 248(1) of the Income Tax Act (the "Act"). The accounting representatives for the Company indicate that the Trust is either an "employee benefit plan" or "employee trust".

Interpretation Bulletin IT-502 (the "IT") states at paragraph 48 therein that if a payment is made out of or under an employee benefit plan "a requirement to withhold income tax will arise at the earlier of the date payment is made to the recipients or the date on which they acquire an unrestricted right to receive payment." However, the IT goes on to state that "No liability for withholding is required by a trustee in respect of allocations or payments made to beneficiaries out of or under an employee trust."

Both an "employee trust" and an "employee benefit plan" are defined in subsection 248(1) of the Act.

In order to be an "employee trust" the trustee must elect to qualify the arrangement as on employee trust (the "election") in its return of income filed within 90 days from the end of its first taxation year (paragraph (c) of the definition of employee trust). In our opinion, the first taxation year of the Trust was XXXXXXXXXX, the year in which it was created. Consequently, in order to qualify as an "employee trust" a T3 return should have been filed along with the election for the XXXXXXXXXX taxation year of the Trust even if the Trust had no taxable income to report. Since no election was filed within the required time and this election is not prescribed for purposes of subsection 220(3.2) of the Act, the Trust cannot now elect to be an employee trust on its XXXXXXXXXX T3.

We therefore conclude that the Trust governs an employee benefit plan and as such, the trustees were required to withhold income tax on the payment made to the Employee in XXXXXXXXXX.

It is our understanding that the prescribed form is Form T4 (not Form T4A as stated in paragraph 48 of the IT). See Income Tax Technical News 11 at

http://www.ccra-adrc.gc.ca/E/pub/tp/97187et/97187e.txt.html concerning the correction to paragraph 48.

We trust the foregoing is of assistance. If there are further questions, please contact Gord Kauppinen at 957-8971.

P. Spice
Manager
Deferred Income Plans Section
Income Tax Rulings Directorate
Policy and Legislation Branch