2001 Ruling 2001-0087073 - RETIREMENT COMPENSATION ARRANGEMENT

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: 1. Whether a contribution in respect of an accrued obligation to provide post-retirement health and dental benefits to a trust by a former employer will result in the establishment of a RCA and will be deductible by the former employer pursuant to 20(1)(r). 2. Whether payments from the RCA to the new employer will be required to be included in come pursuant to 12(1)(n.3). 3. Whether the new employer will be entitled to deduct amounts paid to retirees and former employees of the former employer on account of post-retirement health and dental benefits. 4. Whether recipient retirees will be required to include any amount in income under paragraph 56(1)(x) of the Act by virtue of the establishment of the RCA. 5. Whether the distribution of amounts out of the RCA through the new employer to pay eligible medical and dental expenses of retirees under such circumstances are not taxable to employees by virtue of the exception in 6(1)(a)(i).

Position: 1. Yes. 2. Yes. 3. Yes. 4. No. 5. Yes.

Reasons: 1. Legislation. 2. Legislation. 3. These expenses are business outlays or expenses of the new employer and were incurred for the purpose of earning income. 4. The payment of the amount by the new employer is not a payment of an amount out of or under an RCA. 5. The payment of eligible medical and dental expenses of the retirees is a payment of an amount derived from contributions of the former employer to a PHSP.

XXXXXXXXXX 							2001-008707

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re. Advance Income Tax Ruling Request

XXXXXXXXXX
Retirement Compensation Arrangement

This is reply to your letter dated XXXXXXXXXX, in which you revised your previously requested (XXXXXXXXXX) advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayers referred to above, none of the issues involved in the ruling request is:

in an earlier return of the taxpayers or a related person;

being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;
under objection by the taxpayers or a related person;

before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

the subject of a ruling previously issued by the Directorate.

In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act"), and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, proposed transactions and their purposes is as follows:

Definitions

The following terms have the meanings specified:

"CCRA" means Canada Customs and Revenue Agency;

"Holdco" means XXXXXXXXXX;

"Parent" means XXXXXXXXXX;

"Parent Group" means Parent and companies that were affiliated with Parent prior to XXXXXXXXXX;

"PRH&D benefits" means post-retirement health and dental benefits provided for in Plan Document XXXXXXXXXX in respect of retired employees of Subsidiary currently administered by XXXXXXXXXX;

"RCA Trust" means a trust to be established by Subsidiary as settlor;

"Subsidiary" means XXXXXXXXXX;

"Subsidiary Group" means Subsidiary and companies that were affiliated with Subsidiary prior to their acquisition by Parent in XXXXXXXXXX ; and
"Trustee" means the trustee of the RCA Trust.

Facts

Parent is a major provider of XXXXXXXXXX both directly and through subsidiaries. It is a taxable Canadian corporation and public corporation within the meaning of subsection 89(1), with shares listed on the XXXXXXXXXX Stock Exchange and other exchanges. XXXXXXXXXX Parent's business number is #XXXXXXXXXX, its Taxation Centre is XXXXXXXXXX, and its Tax Services Office is XXXXXXXXXX.

In XXXXXXXXXX, Parent acquired all of the common shares of Holdco, a holding company whose holdings were primarily providers of XXXXXXXXXX. At that time, Subsidiary was a direct subsidiary of Holdco and is a corporation governed by the XXXXXXXXXX and a taxable Canadian corporation within the meaning of subsection 89(1). Subsidiary's business number is #XXXXXXXXXX, its Taxation Centre is XXXXXXXXXX, and its Tax Services Office is XXXXXXXXXX.

Parent is in the process of integrating the business activities of the Subsidiary Group and Parent Group. Certain aspects of this integration were the subject of a previous advance income tax ruling dated XXXXXXXXXX, 2000. As part of this integration, on XXXXXXXXXX Holdco amalgamated with a subsidiary of Parent.

In order to streamline administration, most Canadian employees in the Parent Group are employed by Parent and Parent provides services for a fee to other companies in the Parent Group pursuant to a management services agreement. Until recently, the Subsidiary Group had been organized in a similar manner. Most Canadian employees in the Subsidiary Group were employed by Subsidiary and these employees' services were provided to other companies in the Subsidiary Group pursuant to a management services agreement.

As part of the integration process, on XXXXXXXXXX all employees of Subsidiary ("Subsidiary Employees") became employed by Parent and Parent commenced to provide services to the Subsidiary Group for a fee. Certain details relating to this employee transfer, such as the responsibility for post-retirement obligations relating to service with Subsidiary, had not been determined.

Subsidiary had provided the PRH&D benefits to its employees who retired from Subsidiary before XXXXXXXXXX ("Subsidiary Retirees"). These benefits were not funded and were paid by Subsidiary as incurred. Until Parent assumes responsibility for providing post-retirement health and dental benefits to Subsidiary Retirees and Subsidiary Employees relating to service with Subsidiary, the obligation continues to be borne by Subsidiary.

In the financial statements of Subsidiary, an annual expense was recorded on account of the expected future cost of providing post-retirement benefits in accordance with generally accepted accounting principles. The expenses for the years ended XXXXXXXXXX were $XXXXXXXXXX and $XXXXXXXXXX respectively. As at XXXXXXXXXX, Subsidiary had an accrued liability on its balance sheet of approximately $XXXXXXXXXX in respect of this future expense. This figure included the following amounts: $XXXXXXXXXX in respect of the PRH&D benefits, $XXXXXXXXXX in respect of post-retirement Christmas bonuses, and $XXXXXXXXXX in respect of post-retirement provincial health premiums. For purposes of computing income under the Act, Subsidiary deducted the cost of post-retirement health and dental benefits when they became determinable and were paid.

Proposed Transactions

Parent will enter into an agreement with Subsidiary by which it will assume the obligation to provide post-retirement health and dental benefits to persons previously employed by Subsidiary which are equivalent to the PRH&D benefits previously provided by Subsidiary (the "Agreement"). The persons covered by the Agreement will be Subsidiary Employees who were transferred to Parent on XXXXXXXXXX and Subsidiary Retirees. Parent will assume the obligation to directly fund that portion of post-retirement health and dental benefits provided to retired Subsidiary Employees which relates to that period of time that the Subsidiary Employees rendered services to the Parent. Parent will only assume these obligations when the Agreement is effective.

As consideration for the assumption by Parent of the obligation to provide post-retirement benefits, Subsidiary will establish the RCA Trust. The settlor of the RCA Trust will be Subsidiary. The initial Trustee of the RCA Trust will be XXXXXXXXXX. The sole beneficiary of the RCA Trust will be Parent. The terms of the RCA Trust require that payments received by the Parent will be used by the Parent to provide post-retirement health and dental benefits to Subsidiary Retirees and retired Subsidiary Employees.

Subsidiary will pay an amount to Trustee equal to the present value, as determined for financial statement purposes, of the estimated cost of providing post-retirement health and dental benefits which are attributable to services rendered by Subsidiary Employees and Subsidiary Retirees while employed by Subsidiary. Based on the XXXXXXXXXX financial statements, the amount to be paid would be approximately $XXXXXXXXXX. Subsidiary will pay XXXXXXXXXX% of such amount to the Trustee and remit the remaining XXXXXXXXXX% to CCRA in respect of the refundable tax on the contribution. The RCA Trust will invest the funds in an account paying market interest rates with Parent or another financial institution.

Subsidiary will also pay an amount to the Trustee in respect of post-retirement Christmas bonuses and post-retirement provincial health premiums. Based on the XXXXXXXXXX financial statements, the total amount to be paid in respect of these amounts would be approximately $XXXXXXXXXX. This transaction is not the subject of this ruling.

The RCA Trust will make periodic payments to Parent based on schedules of actuarial calculations estimating the share of annual benefits received by Retirees and retired Subsidiary Employees to which the contribution to the RCA Trust relates. The schedule of payments to Parent will be designed to minimize administrative complexity and, therefore, payments will be made no less frequently than, and likely on, an annual basis. Payments received by Parent from the RCA Trust will be used to fund payments by the Parent to the administrator of the post-retirement health and dental plan to fund the benefits provided by the administrator to Subsidiary Retirees and retired Subsidiary Employees. Parent will directly fund that portion of the post-retirement health and dental benefits provided to retired Subsidiary Employees which relates to that period of time that the Subsidiary Employees rendered services to the Parent.

Purpose of proposed transactions

The purpose of the Proposed Transactions is to enable the cost of providing post-retirement health and dental benefits to Subsidiary Employees and Subsidiary Retirees to be borne pro rata by the companies to which services have been rendered in a manner which minimizes administrative complexity and is tax efficient.

Rulings requested and given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

The establishment of the RCA Trust and the contribution to it as described in paragraphs 9 and 10 above will result in the establishment of a retirement compensation arrangement as that term is defined in subsection 248(1) of the Act.

The contribution described in paragraph 10 made by Subsidiary will be deductible by Subsidiary to the extent permitted by paragraph 20(1)(r) of the Act for the taxation year in which the contribution is made.

Pursuant to paragraph 12(1)(n.3) of the Act, Parent will be required to include any payments received out of the RCA Trust in income in the year received and provided that the provision of post-retirement health and dental benefits to retired Subsidiary Employees and Subsidiary Retirees in accordance with the Agreement constitutes a private health services plan as defined in subsection 248(1), payments to retired Subsidiary Employees and Subsidiary Retirees in respect of eligible medical and dental expenses (by virtue of subsection 118.2(2)) pursuant to the Agreement will not be included in computing the income of Subsidiary Employees and Subsidiary Retirees by virtue of the exception in paragraph 6(1)(a)(i) of the Act.

Pursuant to section 9, Parent will be entitled to deduct amounts paid to retired Subsidiary Employees and Subsidiary Retirees on account of eligible medical and dental benefits provided pursuant to the Agreement in the year paid.

No Subsidiary Retirees or Subsidiary Employees will be required to include any amount in income under paragraph 56(1)(x) of the Act by virtue of the establishment and existence of the RCA Trust or the distribution of amounts out of the RCA Trust (or the refunding of any refundable tax).

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the Agreement is executed and the RCA Trust is established and become effective before XXXXXXXXXX.

Yours truly,

Manager
XXXXXXXXXX
Financial Industries Division
Income Tax Rulings
Policy and Legislation Branch