8 May 2001 External T.I. 2001-0072795 - CALU CONFERENCE 2001 QUESTION 3

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.

Document No.: E 2001-0072795
Author: SARAZMI
Reference Date: May 8, 2001
Subject: CALU CONFERENCE - 2001
Section Ref.: 248(1)

Principal Issues: Will the conversion of an established bonus compensation plan into a funded supplementary executive retirement plan result in the application of the salary deferral arrangement provisions or in the retirement compensation arrangement provisions?

POSITION TAKEN: Question of fact.

Reasons: We would have to review the facts related to each conversion before making a determination of which provisions of the Act would apply. See 2000-0024213, 9732101, 9529413, 9910423, 9824357, 9807000

CALU - Conference for Advanced Life Underwriting (2001)

CALU - Conference for Advanced Life Underwriting (2001)

Question 3

Conversion of Bonus Plan to a SERP

An employer has a bonus compensation plan established for its executive personnel. Under the bonus plan, the executives may be paid additional cash compensation based on a formula and the achievement of specified objectives.

The employer, in consultation with the executives, has decided that the needs of the executives would be better served if the funds otherwise used to fund the bonus plan were used to fund a supplementary executive retirement plan ("SERP"). The SERP would be designed as a defined contribution plan whereby the employer would make annual contributions to a trust established to administer the SERP. The employer would use substantially the same criteria as the existing bonus plan in determining the amount that would be contributed to the SERP on behalf of a particular executive.

Would the SERP be a retirement compensation arrangement ("RCA") or a salary deferral arrangement ("SDA") for purposes of the Income Tax Act (the "Act")? In making this determination, would the nature of the assets held within the SERP or the type of pension benefits (defined contribution versus defined benefit) be considered relevant?

Agency's Response

The determination of whether a specific arrangement would constitute an RCA or an SDA for purposes of the Act is a question of fact.

The Agency has provided its general comments regarding the conversion of bonus arrangements for shareholder/managers to supplementary retirement plans in its response to Question 2 at the 1998 Conference for Advanced Life Underwriting. The same principles as enunciated for shareholder/managers would also apply for executive personnel.

An SDA is defined in subsection 248(1), and basically it is an arrangement under which a taxpayer has a right to receive an amount that would otherwise be salary or wages after the year and one of the main reasons for this arrangement is to postpone taxes payable on such salary and wages. An RCA is also defined in subsection 248(1), and basically it is an arrangement by which an employer makes payments to a custodian to fund benefits to be received by the employee after retirement. If it is determined that an arrangement meets the definitions of both an RCA and an SDA, we note that, since paragraph (k) of the definition of an RCA specifically excludes an SDA from being an RCA, the arrangement would be treated as an SDA for purposes of the Act.

Where it can be established that a SERP, implemented for the benefit of the executives of a corporation, is not designed to defer the taxation of a right to employment income and the arrangement is designed primarily for the purpose of supplementing the maximum benefits that the executive is allowed to receive on or after retirement under a registered pension plan, the arrangement would be considered a retirement compensation arrangement. In general, a funded and unregistered pension plan will not meet the definition of a salary deferral arrangement but will be considered a retirement compensation arrangement for purposes of the Act.

In the general situation described above, it may be very difficult to support an argument that the arrangement is not designed or intended to postpone the taxes that would otherwise be payable in respect of an employee's salary and wages. The employer and the executives would have considered the tax benefits in deciding to replace the bonus plan with a SERP.

Generally, the determination of whether a SERP would constitute an SDA or an RCA would not depend on whether the SERP was a defined benefit or defined contribution type of pension plan or on the nature of the assets held by the trustee under the SERP.

Prepared by:   	Mickey Sarazin
		Section 43
		May 1, 2001