14 February 2001 Internal T.I. 2000-0061117 - Rabbi Trust and 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: Can the assets of an RCA trust be subject to the claims of the employer corporation's creditors in the event of an insolvency or bankruptcy of the employer corporation?

Position: Yes.

Reasons: Nothing in the Act to prevent this where the terms of the arrangement allow for it.

			February 14, 2001

		WINNIPEG TAXATION CENTRE 	HEADQUARTERS
	Pearl Fedick 	Income Tax Rulings
	RCA Unit 	  Directorate
M. P. Sarazin
			824-5441

			2000-006111

RCA Property Subject to Claims of Employer Creditors

We are writing to you in response to your referral to Trust Accounts Division of the Revenue Collections Directorate, which was forwarded to us on December 11, 2000, requesting our views as to whether a property of a retirement compensation arrangement ("RCA") trust could be subject to the claims of the employer corporation's creditors in the event of an insolvency or bankruptcy of the employer corporation.

The situation involves the termination of an employee where the employer corporation has agreed to secure by letter of credit supplementary retirement payments to be made in the future. It is proposed that a letter of credit will be held by an RCA trust, with variations in the amount of the letter of credit over the life of the trust. The terminated employee, who will be the beneficiary under the RCA trust, currently resides and works in the United States. In order to avoid an income inclusion for U.S. tax purposes as a result of securing the pension obligations by the use of an RCA trust, it is proposed that the assets of the trust be subject to the claims of the employer corporation's creditors in the event of an insolvency or bankruptcy of the employer corporation. Such an arrangement is referred to as a "rabbi trust" under U.S. tax law and it avoids the inclusion of the letter of credit amount in the former employee's income for U.S. income tax purposes.

You have been asked to comment whether the proposed arrangement would constitute an RCA for purposes of the Income Tax Act (the "Act").

Comments

Opinions concerning proposed transactions involving specific taxpayers should only be provided in response to a request for an advance income tax ruling. Your client should be advised that an advance income tax ruling will be provided if a request is submitted in accordance with the procedures detailed in Information Circular 70-6R3 dated December 30, 1996.

An RCA is defined in subsection 248(1) of the Act to mean a plan or arrangement under which contributions are made by an employer or former employer of a taxpayer to another person or partnership 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 the services rendered by the taxpayer, the retirement of the taxpayer or the loss of office or employment of the taxpayer. There is nothing in the provision that prevents the assets of the RCA trust from being subject to the claims of the employer corporation's creditors in the event of an insolvency or bankruptcy of the employer corporation. The recipients of the amounts paid out of the RCA trust (i.e., the employee where retirement payments are made to the employee or the employer where payments are made to satisfy creditor claims against the employer) will have to include such payments in income under paragraphs 56(1)(x) or 12(1)(n.3) of the Act.

We have concluded that a rabbi trust could be an RCA. This conclusion was reached in our ruling 951276 dated XXXXXXXXXX, 1995 wherein we ruled that certain contributions made under an arrangement established in the U.S. by a U.S. corporation, for the benefit of its employees and the employees of its subsidiaries, would constitute a resident's contribution within the meaning assigned by subsection 207.6(5.1) of the Act. Consequently, such an arrangement would have been an RCA had it not been for the exception in paragraph (l) of the definition of "retirement compensation arrangement". This exception excludes arrangements established primarily for the benefit of non-residents in respect of services rendered outside of Canada. Consequently, a rabbi trust type of arrangement may constitute an RCA for purposes of the Act.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Roberta Albert, CA
for Director
Financial Industries Division

c.c. Denyse E. Bertrand
Policy and Technical Support Section
Trust Accounts Division
Revenue Collections Directorate