31 March 2003 External T.I. 2003-0004595 - T4 REQUIREMENTS FOR RCA

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:

What is the taxation effect to employee in a group savings plan arrangement?

Position:

The arrangement appears to be an RCA. As such, employees are taxed when amounts are paid to them from the RCA.

Reasons:

Employees are not entitled to amounts from the group savings plan until they cease employment with the employer. As such, the arrangement appears to fit the definition of RCA. Under 56(1)(x), an amount received in a year from an RCA is taxable to the recipient.

2003-000459
XXXXXXXXXX Renée Shields
(613) 948-5273
March 31, 2003

Dear XXXXXXXXXX:

Re: Taxation of Employees in a Group Savings Plan

This is in response to your facsimiles of February 21 and 27, 2003 inquiring about the taxation of employees participating in a group savings plan, and in particular, the T4 filing requirements with respect to employer contributions to such a plan.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

You have described an arrangement whereby employees contribute 3% of their salary to a savings plan, which contribution is matched by the employer. The fund is administered by the XXXXXXXXXX. Contributions are locked into the plan and funds are not redeemable until the employee is no longer employed by the employer. We would generally view such an arrangement as a retirement compensation arrangement ("RCA"), which term is defined in subsection 248(1) of the Income Tax Act (the "Act").

Generally speaking, an RCA is defined to include a plan or arrangement under which contributions are made by an employer or former employer of a taxpayer to another person (referred to as a custodian) in connection with benefits that are to be or may be received or enjoyed by any person on, after or in contemplation of any substantial change in the services rendered by the taxpayer, the retirement of the taxpayer or the loss of an office or employment of the taxpayer other than certain excluded arrangements. Upon receipt of such amounts, the RCA beneficiary is taxable pursuant to paragraph 56(1)(x) of the Act. Contributions to an RCA, and earnings in the plan, are subject to a special 50% refundable tax under Part XI.3 of the Act. The RCA tax is refunded when distributions are made from the RCA.

The CCRA has made available a helpful publication regarding RCA's, which is entitled "4041 Retirement Compensation Arrangements Guide" (the "RCA Guide"). The RCA Guide can help you with questions about the 50% refundable tax payable on all contributions and earnings of an RCA. Under paragraph 8(1)(m.2) of the Act, an employee is entitled to deduct his or her contributions to the RCA. You will find our general views regarding the deductibility of contributions on page 7 of the RCA Guide. The Guide also explains how to complete the T4A-RCA for distributions to RCA beneficiaries.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch