14 June 2002 Internal T.I. 2001-0096897 - SUPPLEMENTARY EMPLOYEE RETIREMENT 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 CCRA.

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

Principal Issues:

Is a supplemental pension plan which uses notional accounts to record member allocations an RCA?

Position:

Question of fact. Depends on whether it is actually funded.

Reasons:

The definition of an RCA in subsection 248(1) requires that a contribution be made.

									June 14, 2002

TORONTO CENTRE TSO					HEADQUARTERS
Provis Wong	 						P. Kohnen, CMA
Section 443-2-5						(613) 957-2093

								2001-009689

Supplementary Employee Retirement Plan

This is in reply to your submission of August 14, 2001, and the submission from your client, as well as our subsequent telephone conversations (Kohnen/Wong) in which you requested our views regarding the appropriate taxation status of the Supplementary Employee Retirement Plan ("SERP") sponsored by the taxpayer client. We have responded to you directly, rather than the client, as the appropriate taxation of the transactions involved in this case will be based upon determination of facts encountered during your general audit of the taxpayer.

We have reviewed the documents submitted, including the letter of August 10, 2001 from the taxpayer's representatives, as well as the copy of the SERP effective XXXXXXXXXX. We have not attempted to verify the facts provided.

During the course of your audit, you expressed the opinion that the above-referenced SERP was a retirement compensation arrangement ("RCA"), as defined in subsection 248(1) of the Income Tax Act (the "Act"). Both the client and their representative have expressed the opinion that the plan is not an RCA.

Our review of the SERP plan document that was submitted noted the following provisions:

1. The plan was established by the taxpayer (as plan sponsor) on XXXXXXXXXX for employees (officers of the company) who were members of the company's registered pension plan ("RPP") and whose benefits are at the money purchase limit (as defined in subsection 147.1(1) of the Act).

2. The plan terms provide that the sponsor need not and will not set up a trust or allocate funds or prefund or provide security in respect of the SERP benefits; nor do they have to provide any benefits until they fall due.

3. The plan terms provide that the plan will not be registered.

4. Membership in the SERP is compulsory for any officer for whom contributions to the company RPP would exceed the money purchase limits, if the contributions formula in the RPP were followed without regard for such limits.

5. The sponsor is required to credit each member's notional account with contributions that would have been made to the RPP if not for the money purchase limits.

6. The plan provides that members (or their beneficiaries or estate) have no entitlement to any benefits until the earliest of:

(a) termination of employment after XXXXXXXXXX years of service,

(b) retirement on or after the early retirement date, or

(c) death.

7. Benefits are payable in a single lump sum unless the member elects for either a XXXXXXXXXX annual installment option. Members can also defer payment of the lump sum or installments until benefits from the RPP commence to be paid.

8. The plan terms provide for the plan to be unfunded and unsecured, and that benefit payments are to be made from the general revenues of the plan sponsor.

9. The parent company of the sponsor guarantees to make the benefit payments in the event that the sponsor is not able to.

The taxpayer's representatives argue that the SERP is not an RCA as no contributions have been made in connection with benefits that are to be received by employees upon a substantial change in their services, retirement or loss of office. They point out that the plan terms support this position and they note that their understanding of the facts is as follows:

(a) the sponsor has contributed to an investment account in order to match the plan liabilities of the SERP,

(b) the funds invested are not in trust for the SERP,

(c) the funds are not earmarked for the SERP, and

(d) the funds would be available to the general creditors of the sponsor in the event of bankruptcy.

You have noted in your submission and confirmed during our telephone discussions (Kohnen/Wong) that the employer has claimed on their corporate tax return a deduction from income as a pension contribution the amounts contributed to the investment account to match the liabilities of the SERP.

We are providing our comments on the following issues as noted below:

1. Is this SERP an RCA?

2. Does the investment of assets by the employer to match potential plan liabilities constitute a contribution to the plan (funding)?

3. Does the guarantee of benefits by the parent company constitute funding of the plan?

4. At what point in time can the employer claim a deduction from income in respect of contributions to the plan?

1. & 2.) In our document 9619803 dated XXXXXXXXXX, 1996, which the taxpayer's representative has referred to, we provided rulings in respect of a supplemental retirement arrangement ("SRA") that was similar in design to the plan in question here. The plan which we ruled on was set up to provide benefits in addition to those in the plan sponsor's registered pension plan that were capped at the maximum under the Act. Benefits became payable only when benefits from the RPP became payable due to retirement, termination, death or disability. The sponsor proposed to set aside funds from its operating surplus to be earmarked for its SRA obligations for financial accounting purposes. However, the assets: i) did not constitute trust property, ii) were available to the sponsor's general creditors, iii) could be used for any purpose, iv) were commingled with other assets of the sponsor, and v) were not subject to direct claim by any member of the SRA. Based on the above facts, we ruled that the SRA was neither an SDA nor an RCA.

Similar rulings were provided in rulings documents 9712223 dated XXXXXXXXXX, 1997 and 9718733 dated XXXXXXXXXX, 1997 in respect of similar SRA plans which were to be notionally funded and to which the same restrictions applied to funds set aside to match plan obligations as are noted above in respect of document 9619803.

It is a question of fact as to whether the above-noted restrictions do in fact apply to the amounts that your client has invested in order to match the plan liabilities. The plan terms as submitted support such a conclusion, however, it remains for you to determine if the plan terms reflect the actual conditions governing those funds.

3.) Reference may also be made to document 90060 dated November 1, 1990 in which we confirmed that a personal guarantee by a major shareholder of a corporation in connection with retirement benefits provided by the corporation did not constitute an RCA as it was not a contribution to another person. This position was confirmed in document 9711103 dated XXXXXXXXXX, 1997, in which we noted that a guarantee by a shareholder parent is insufficient to cause funding.

4.) It should be noted that no deduction from income is provided in the Act in respect of an amount invested in order to match plan liabilities, if the amount does not constitute a contribution to an RCA or the payment of a benefit to a plan member or their beneficiary. We note that the response from the plan sponsor's representative to your letter of May 17, 2001 does not address the issue of the deduction that was claimed by the sponsor for amounts invested in an investment account to match the liabilities of the SERP. We would suggest that your client be queried as to what basis was used to support their claim for a deduction in respect of the above amount. Based on the facts and information submitted, it appears that the amount may have been deducted in error, in which case, an adjustment to income may be the only action required.

We trust that the above comments will be of assistance to you. Please do not hesitate to contact Phillip Kohnen at 957-2093 should you require further information.

Roberta Albert, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate