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. Is accrued income accumulated under an exempt insurance policy held in an RCA taxable.
2. Can an RCA secure loans with its holdings?
Position:
1. Not generally
2. There are no restrictions but there could be concerns.
Reasons:
1. Application of law on exempt policies applies for RCA purposes
2. The use of property to secure a debt may mean the RCA funds are not being used to secure anticipated benefits to employees.
February 6, 2003
HEADQUARTERS HEADQUARTERS
Media Relations Income Tax Rulings
4th Floor Connaught Building Directorate
W. C. Harding
Attention: Sam Papadopoulos 957-8953
Media Relations Officer
2003-000079Retirement Compensation Arrangement ("RCA")
This is in reply to your email request of January 30, 2003, in respect of the inquiry made by XXXXXXXXXX questions and our replies to them are as follow:
Question 1
In the RCA investment account, if it is invested in a tax-exempt life insurance policy will CCRA allow all growth in the investment account in this type of product to compound tax-free until the beneficiary of the RCA withdraws an income from the RCA?
A trust governed by an RCA is exempt from taxation under Part I of the Income Tax Act (the "Act") by virtue of paragraph 149(1)(q.1) of the Act. However, the trust is subject to a refundable tax as calculated under Part XI.3 of the Act. In basic terms, the refundable tax is 50% of all contributions made to the RCA, plus 50% of the amount by which its income and capital gains for all years exceeds its losses and capital losses for all years, less 50% of all distributions made out of the trust. For the purposes of this calculation, the income (or loss) for a year of an RCA trust is defined as the total of the income (or loss) for the year of the trust from each business or property (determined as if the Act were read without reference to any dividend gross up normally included under paragraph 82(1)(b) of the Act). It is CCRA's position that the income of an RCA trust is the income of the trust as otherwise determined under the Act. Accordingly, where a trust governed by an RCA holds an interest in an insurance policy, the trust must determine its income under the policy for each year in accordance with the provisions of the Act as they apply to the policy. In this respect, we can confirm that, generally, by virtue of subsection 12.2(1) of the Act, accumulating income of a life insurance policy that is an exempt policy as described in Section 306 of the Income Tax Regulations, is not included in the income of a taxpayer that holds the policy. Therefore, while an RCA is taxable on income from a business or property, an RCA which invests in an exempt policy will not be taxable on income accruing within the policy.
Question 2
How does CCRA view RCA contributions in the RCA Investment Account being pledged to secure a loan that is lent back to the operating company? Has CCRA ever deregistered an RCA that had used the investment account to secure a loan? If they have, is there any public documentation on the over turning of an RCA? In this respect, it is noted that on page 8 of the RCA Guide regarding completing the first T3-RCA Step 1, it states: "If you loan money out of the trust, answer Yes to question 8, and provide a copy of the loan agreement".
There is no provision for the registration of RCAs. Accordingly, no RCA has or could be deregistered.
The Act does not provide any specific restriction on the use of property held by a trust governed by an RCA as security for a loan. However, an RCA is intended to provide secure funding for benefits to be provided as a consequence of the retirement of an employee, the loss of an office or employment of an employee, or a substantial change in the services provided by an employee. Accordingly, if an employer can use the funds to secure some other obligation, it raises a concern that the arrangement is not, in fact, a valid RCA. In this respect, we would also note that there might be concern under trust law, on the legal basis by which an employer can use funds held in a trust established for the benefit of employees, to secure personal obligations of an employer.
A similar situation might arise where a trustee of an RCA lends funds to a participating employer where the funds were borrowed from a third party by means of a loan that was secured with property held by the trust. The effect of this situation is similar to the above in that the property of the trust is used to secure the debt and is not used to secure the benefit entitlements of the employee beneficiaries. Accordingly, there is a concern that the arrangement is not a valid RCA.
If it is determined that an arrangement is not an RCA, the proper taxation of the arrangement would have to be considered. This could include a disallowance of the deduction of contributions made under the arrangement and the treatment of the trust as a taxable inter-vivos trust possibly governed by an employee benefit plan or a salary deferral arrangement.
The consideration of the above factors in any specific situation is a function of the CCRA Compliance Programs Branch. XXXXXXXXXX.
While not specific to RCAs, this type of arrangement has been reviewed by the courts in relation to a registered pension plan in Kleysen's Cartage co. Ltd. V Minister of National Revenue 71 DTC 344. Related commentary was also presented by CCRA at the 1998 Conference for Advanced Life Underwriters in response to a number of questions concerning RCAs. The questions and answers presented at the conference are provided in our file E9807000. A copy of this document may be obtained through our access to information group at (613) 957-2137.
If you have any questions, please do not hesitate to contact Wayne Harding at 957-9769.
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
c.c.: Chris Sterling
Policy and Technical Services Section
Trust Accounts Division
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