2002 Ruling 2001-0110223 - UNFUNDED SUPPLEMENTAL PENSION 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 the Supplemental Retirement Arrangement (unfunded pension plan) an SDA or an RCA?

Position: No

Reasons:

It is an unfunded arrangement to provide pension benefits that are supplementary to the benefits under an RPP. There is no trust set up.

XXXXXXXXXX 							2001-011022

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling - XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX and various telephone calls (XXXXXXXXXX) requesting an advance income tax ruling for the above-noted taxpayer.

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

FACTS

1. The address of the XXXXXXXXXX (the "Employer") is, XXXXXXXXXX.

2. The Employer is a corporation without share capital created under XXXXXXXXXX . Its tax account number is XXXXXXXXXX.

3. The Employer is a registered charity exempt from tax under paragraph 149(1)(f) of the Income Tax Act (Canada) (the "Act"). Its registration number is XXXXXXXXXX.

4. The Employer files its returns at the XXXXXXXXXX Tax Services Office of the Canada Customs and Revenue Agency (the "Agency").

5. Currently, the Employer provides a registered pension plan as defined in subsection 248(1) of the Act, registration number XXXXXXXXXX. The plan, called XXXXXXXXXX (the "Pension Plan"), is a defined benefit plan and was established effective XXXXXXXXXX. The Employer, through its Board of Governors, is the administrator of the Pension Plan.

6. All employees are required to join the Pension Plan after XXXXXXXXXX years of service. XXXXXXXXXX.

7. The pertinent terms of the Pension Plan, for purposes of this advance income tax ruling request, are as follows:

(a) Eligibility

Participation is compulsory for all employees on the first day of the month immediately following XXXXXXXXXX years of service, or attainment of age XXXXXXXXXX, whichever is the earliest. However, employees may elect to join the Pension Plan on the first of any month after becoming an employee.

(b) Retirement Date

(i) Normal

XXXXXXXXXX Staff - The first day of July coincident with or next following attainment of age XXXXXXXXXX.

XXXXXXXXXX Staff - The first day of the month coincident with or next following attainment of age XXXXXXXXXX.

(ii) Early

On or after the attainment of age XXXXXXXXXX.

(iii) Postponed

By mutual consent on a year-to-year basis, but not beyond age XXXXXXXXXX.

(c) Contributions

(i) Required by Each Member

Members are required to contribute XXXXXXXXXX% of earnings up to the Year's Maximum Pensionable Earnings (YMPE) under the Canada Pension Plan and XXXXXXXXXX% of the excess. Members of a religious order who do not contribute to the Canada/Quebec Pension Plan, contribute XXXXXXXXXX% of earnings.

If the member is receiving benefits from the Employer's long term disability insurance program, the member contributions will cease but the member will continue to accrue benefits under the Pension Plan.

(ii) By the Employer

The balance of the amount required to fund current benefit accruals, and such amounts as are necessary to ensure adequate funding for benefits on account of prior service are funded by the Employer. XXXXXXXXXX.

(d) Retirement Benefits

(i) Normal or Postponed

For credited service prior to XXXXXXXXXX% of the average of the member's best XXXXXXXXXX months' earnings.

For credited service on and after XXXXXXXXXX% of the annual average of the member's best XXXXXXXXXX months' earnings up to the average annual YMPE under the Canada Pension Plan in effect over the same months used to calculate the member's average earnings, and XXXXXXXXXX% of the excess for each year of such service. Members who do not contribute to the Canada Pension Plan receive a benefit of XXXXXXXXXX% of the average highest XXXXXXXXXX months' earnings for each year of credited service.

(ii) Early

Each member who retires early shall receive an immediate pension calculated as for normal pension above:

• Without reduction if the member had attained age XXXXXXXXXX or had satisfied the rule of XXXXXXXXXX (age + credited service = XXXXXXXXXX).
• Actuarially reduced for the period that the early retirement date precedes the earlier of attainment of age XXXXXXXXXX or rule of XXXXXXXXXX.

(iii) Disability

Members in receipt of benefits from the Employer's long-term disability insurance program retire on their normal retirement date and receive the benefit credited to them under (i) above.

(e) Termination of Employment

(i) Deferred Pension Entitlement

The member is entitled to receive a deferred pension equal to the benefit accrued to the date of termination of service and commencing on the first day of the month coincident with or next following the day on which either (a) the member attains the age of XXXXXXXXXX, or (b) the member's age plus actual credited service is equal to XXXXXXXXXX or more and the age is greater than XXXXXXXXX .

(ii) Prior to the Completion of XXXXXXXXXX Years of Service

In lieu of the benefit described under (i), the member may request a return of his or her accumulated required contributions with interest to the date of termination.

(iii) Transfer Entitlement

Members who terminate prior to attaining age XXXXXXXXXX are allowed to transfer to an RRSP or other pension plan on a locked-in basis, the maximum between:

the commuted value of the deferred pension entitlement,

and

XXXXXXXXXX the member's accumulated required contributions with interest, other than for leave of absence, purchase of prior service or during receipt of disability benefits,

plus

the member's required contributions for leave of absence, purchase of prior service or during receipt of disability benefits.

iv) Minimum Employer Cost

The value of the deferred pension entitlement shall be at least XXXXXXXXXX% funded by the Employer. Any employee contributions in excess of XXXXXXXXXX% of the value of the deferred pension entitlement shall be available to provide additional benefits to the member.

(f) Death Benefits

(i) Before Normal Retirement

Upon death prior to retirement the member's beneficiary shall receive the amount which would have been payable, without the age XXXXXXXXXX restriction, as a transfer value had the member terminated employment just prior to his death.

(ii) After Normal Retirement

The normal form of pension provides for a guarantee of XXXXXXXXXX monthly payments. If the member's spouse at time of retirement is alive after the XXXXXXXXXX payments have been made, XXXXXXXXXX% of the benefits paid to the spouse until death.

(g) Indexation of Benefits

Deferred pensions are indexed to the increase in the CPI minus XXXXXXXXXX % during the deferral period to a maximum increase of XXXXXXXXX% per annum. All pensions in payment are indexed annually by the increase in the CPI minus XXXXXXXXXX% up to a maximum increase of XXXXXXXXXX% per annum. Notwithstanding the above, if the increase in CPI is XXXXXXXXXX% or less, then indexation is provided up to the lesser of XXXXXXXXXX% or the actual rate of increase in the CPI for both deferred and retired pension entitlements. Additional increases to reflect, in total, full CPI increases (i.e., to cover increases not previously granted due to the XXXXXXXXXX % reduction of indexation or the XXXXXXXXXX% maximum) to the date of adjustment are granted automatically, provided the Pension Plan surplus position meets specific conditions. All increases for indexation are restricted to those limits as imposed under the Act.

8. At its meeting of XXXXXXXXXX, the Board of Governors of the Employer gave preliminary approval to the creation of the XXXXXXXXXX (the "SRA") and to the proposed changes to the Pension Plan (see 9 below). This decision is the result of a long consultation process, including surveys among the Employer's employees who voted in favour of such modifications. This pension policy reform of the Employer is now at its final stage, namely obtaining governmental authorities approval.

9. The following is a summary of the proposed changes to the Pension Plan:

(a) Employee contribution rates and refunds:

Effective XXXXXXXXXX, the YMPE is replaced by XXXXXXXXXX% of the YMPE for the calendar year XXXXXXXXXX in the employee contribution formula. Required employee contribution rates would be reduced by XXXXXXXXXX%, from the current level of XXXXXXXXXX retroactively to XXXXXXXXXX and then would be subject to a temporary contribution holiday. Such rates would be applied on earnings up to the maximum salary paid to XXXXXXXXXX plus XXXXXXXXXX%, subject to contribution maximums under section 8503(4)(a) of the Income Tax Regulations (the "Regulations"). The temporary employee contribution holiday would cease effective XXXXXXXXXX and contributions would revert to the reduced contribution rates noted above from that point forward.

Plan members would also receive a refund of XXXXXXXXXX % of their past required contributions with interest to XXXXXXXXXX, with a special adjustment for retirees to reflect the pension payments received. Retirees would also receive an additional cash payment from surplus.

Two further rate reductions and refunds (using pre-XXXXXXXXXX contributions) of XXXXXXXXXX% each would be made on XXXXXXXXXX and on XXXXXXXXXX, subject to the condition that an actuarial valuation, performed at each of the foregoing dates, reveals a surplus of at least XXXXXXXXXX % of actuarial liabilities. Should such surplus test not be met at these dates, testing would continue every year until XXXXXXXXXX and if not met by this date, no further reductions or refunds would occur.

(b) Retirement benefits

The annual pension formula, for each year of past and future service, would be retained but the XXXXXXXXXX% benefit would apply on average earnings up to the lesser of XXXXXXXXXX% of the average YMPE or XXXXXXXXXX% of the YMPE for the calendar year XXXXXXXXXX , and the XXXXXXXXXX% benefit would apply on average earnings in excess of that amount. Moreover, the pension would be tested against a minimum pension formula equal to XXXXXXXXXX% of average earnings for each year of past and future service.

PROPOSED TRANSACTIONS

10. Subject to the receipt of a favourable income tax ruling from the Agency, the Employer will establish the SRA for employees of the Employer, which will be effective on or after XXXXXXXXXX. An employee shall become a member of the SRA ("Member") if his/her pension benefits under the Pension Plan are restricted by the maximum pension limit under the Act pursuant to subsection 8504(1) of the Regulations.

11. The SRA will provide lifetime retirement benefits to Members equal to the lifetime retirement benefits that would otherwise be payable from the Pension Plan if the limits on lifetime retirement benefits prescribed under subsection 8504(1) of the Regulations were not applied, minus the lifetime retirement benefits actually payable from the Pension Plan. The SRA will recognize pensionable earnings up to the following maximum amounts:

• for service to XXXXXXXXXX, the pensionable earnings required to reach the $XXXXXXXXXX maximum pension indexed by the greater of the increase in the Average Wage Index and the increase in the Consumer Price Index from XXXXXXXXXX to the year of pension calculation (such maximum pension is $XXXXXXXXXX for year XXXXXXXXXX);

and

• for service from XXXXXXXXXX, the maximum salary for XXXXXXXXXX plus XXXXXXXXXX%.

12. The benefits payable to Members under the SRA will be the same benefits as described in the Pension Plan above. These benefits include retirement benefits, termination benefits, death benefits and any disability benefit, and shall be payable at the same time and in the same form of payments as the benefits payable from the Pension Plan. However, the SRA benefits will be indexed only on an ad hoc basis, with automatic indexation to occur only when the Pension Plan also covers the XXXXXXXXXX% reduction of indexation on an automatic basis as a result of its surplus financial position and, as noted, in 7(g) above.

13. The benefits payable under the SRA shall be paid from the Employer's operating funds. For financial accounting purposes, the Employer shall set aside funds from time to time in a special purpose fund (the "Fund") in respect of the liabilities under the SRA. At all times, the Employer shall retain ownership of the funds set aside in the Fund. The Employer shall not contribute the funds to a trust or to any other person or legal entity and shall ensure that the assets set aside in the Fund do not constitute separate and distinct trust property. The funds will be invested either under the direction of the Employer or such third party investment manager as the Employer may employ to invest the funds.

14. The Fund shall not be subject to the direct claim of any of the Members of the SRA in respect of their benefits payable hereunder. In addition, the funds shall be subject to the claims of the Employer's creditors in accordance with applicable bankruptcy legislation in the event of the Employer's receivership, bankruptcy or windup.

15. It is intended that the Employer will be able to set aside funds to the Fund each year as a result of having funds available due to a reduction in its contributions to the Pension Plan. These reductions in the Employer contributions would instead be covered by surplus funds under the Pension Plan allowing the Employer to have a contribution holiday as provided for in the Pension Plan. The accrual of lifetime retirement benefits under the SRA may be suspended from time to time if the Employer has to make full contributions to the Pension Plan due to insufficient surplus funds in the Pension Plan.

PURPOSE OF THE PROPOSED TRANSACTIONS

16. The purpose of the proposed transactions is to provide supplemental retirement benefits to members of the Pension Plan that have their retirement benefits restricted as a result of limits imposed by the Act and Regulations. The Employer will fund such retirement benefits by setting aside funds that it would normally have to contribute to the Pension Plan if it were not for the surplus in the Pension Plan.

ADDITIONAL INFORMATION

17. To the best of your knowledge and the knowledge of the Employer, none of the issues involved in this request for advance income tax rulings are:

(a) in an earlier return of the Employer or a person related to the Employer;

(b) being considered by a tax services office or taxation centre in connection with a previously filed return of the Employer or of a person related to the Employer;

(c) under objection by the Employer or by a person related to the Employer;

(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; nor

(e) subject to a ruling previously issued by the Income Tax Rulings Directorate to the Employer.

RULINGS GIVEN

Provided that the preceding statement of facts and the description of the proposed transactions are correct and constitute a complete disclosure of all the relevant facts and terms of the proposed SRA, and provided the SRA is established as proposed, we rule as follows:

A. The SRA will not constitute a salary deferral arrangement as that term is defined in subsection 248(1) of the Act.

B. Provided that the SRA does not result in the creation of a trust, the SRA will not constitute a retirement compensation arrangement as that term is defined in subsection 248(1) of the Act.

C. All payments made by the Employer to a Member or his or her beneficiary, as the case may be, under the terms of the SRA will be included in the income of the recipient in the year it is received as a superannuation or pension benefit pursuant to subparagraph 56(1)(a)(i) of the Act.

D. No amount will be included in the income of a Member under subsection 5(1) or paragraph 6(1)(a) of the Act as a result of, in and by itself, the Member's participation in the SRA.

The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the SRA is implemented by XXXXXXXXXX.

COMMENTS

This letter does not express or imply, and should not be construed as expressing or implying, any confirmation or approval in respect of the proposed amendments to the Pension Plan. This approval or confirmation can only be given by the Registered Plans Directorate or the corresponding provincial pension authority.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate