28 November 2002 External T.I. 2002-0145175 - SUPPLEMTARY PENSION FUNDING

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:

Will various procedures for the payment of unfunded pension plans result in the creation of RCAs.

Position:

It is possible that some of the methods could create RCAs but, because it is a factual determination only general comments can be provided.

Reasons:

Detailed information must be provided in order to determine the tax consequences.

XXXXXXXXXX 2002-014517
W. C. Harding
November 28, 2002

Dear XXXXXXXXXX:

Re: Method of Payment of Unfunded Supplementary Pensions

This is in reply to your letter of June 10, 2002, in which you requested a technical opinion on behalf of your clients in respect of the payment of benefits under unfunded supplementary pension plans ("SPPs") and, in particular, whether certain methods for making these payments would result in the establishment of retirement compensation arrangements ("RCAs").

This Directorate may only provide written confirmation of the tax implications inherent in particular situations when the transactions involved are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in the Canada Customs and Revenue Agency ("CCRA") Information Circular 70-6R5 dated May 17, 2002. Where the particular transactions are completed, the enquiry should be addressed to the relevant District Taxation Office. However, we can provide the following comments, which are general in nature and are not binding on the CCRA.

In your letter you asked if an RCA could arise when arrangements are established that are designed to allow pensioners to receive a single cheque that represented the payment of the combined benefits payable out of a registered pension plan ("RPP") and a related SPP. Such arrangements might occur where:

? an employer pays supplementary benefits to the trustee of an RPP either periodically or as they become payable, so they can be included with the RPP benefits paid to the pensioner;

? an employer pays supplementary benefits to an account with the person that acts as the trustee of an RPP either periodically or as they become payable, and that person issues benefit cheques to the pensioner drawn on both the RPP and SPP account;

? both the employer and the trustee of an RPP pays benefits either periodically or as they become payable, to a separate account with the person that acts as the trustee of the RPP and that person issues benefit cheques to the pensioner drawn on that account; or

? both the employer and the RPP forward benefits either periodically or as they become payable, to a payroll service provider which issues combined benefit cheques to the pensioner.

In general terms, the provisions of the Income Tax Act (the "Act") pertaining to RCAs apply to any arrangement, whether contractual or otherwise, where contributions are made by an employer, a former employer or a person who is not dealing at arm's length with the employer, to a custodian in connection with benefits that are to be paid to a former employee on retirement or loss of employment, except in specific excluded situations.

The term "contributions" is not defined in the Act for this purpose and could, in our opinion, include any of the payments made by an employer or an RPP in the examples described above. Furthermore, the Act does not specify that contributions must be held for any period of time for the RCA provisions to apply. In consequence, the RCA provisions could apply in any situation where a contribution is held for a short period of time, such as one day, or for a longer period of time, such as a week or a month. Nevertheless, if an arrangement can be established where a payment is made to a person, such as a payroll administrator, who is acting in an agency capacity for the employer, we would generally agree that an arrangement would not be an RCA.

Particular to the situations described above, in our opinion, a deposit of an SPP benefit into an RPP account would not be a "permissible contribution" as described in section 8502 of the Income Tax Regulations (the "Regulations") and could result in the RPP becoming revocable. Similarly, if an amount is paid out of an RPP to another person, consideration would have to be given to the status of the person in receiving the funds. If that person is not receiving the amounts as an agent for either the RPP or the beneficiary, the payment may not be a "permissible distribution" of the RPP as defined in section 8502 of the Regulations.

We trust that these comments will be of assistance to you

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch