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.
Can an RCA deduct its administration costs (such as those associated with distributing pensions; financial statement preparation and collection of employer contributions) in calculating its refundable tax for the year?
These costs are not an expense of earning income from business or property..
XXXXXXXXXX Renée Shields
October 17, 2003
Re: Retirement Compensation Arrangement ("RCA") Part XI.3 Tax Return
This is in response to your electronic correspondence of March 25, 2003 inquiring whether an RCA can deducts its costs related to the administration of the RCA plan in computing its income (loss) from business or property for the purposes of calculating the refundable tax under subsection 207.5(1) of the Income Tax Act (the "Act").
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.
The CCRA's general views regarding RCA's are contained in the RCA Guide (T4041).
An RCA is defined in subsection 248(1) of the Act as generally being an arrangement under which payments are made by an employer to a custodian in connection with benefits that are to be received by an employee on or after retirement. When this occurs subsection 207.6(1) of the Act deems the property so held to be property of an inter vivos trust and the custodian (employer) the trustee for the purpose of Parts I and XI.3 of the Act.
Although an RCA trust within the meaning assigned by subsection 207.5(1) of the Act is not subject to Part I tax by virtue of paragraph 149(1)(q.1) of the Act, it is subject to the 50% refundable tax calculated under Part XI.3 of the Act. Pursuant to subsection 207.5(1) of the Act, the "refundable tax" of an RCA trust at the end of a taxation year means the amount, if any, by which the total of:
a) 50% of all contributions made under the arrangement while it was a retirement compensation arrangement and before the end of the year, and
b) 50% of the amount, if any, by which
i) the total of all amounts each of which is the income (determined as if this Act were read without reference to paragraph 82(1)(b)) of an RCA trust under the arrangement from a business or property for the year or a preceding taxation year or a capital gain of the trust for the year or a preceding taxation year,
ii) the total of all amounts each of which is a loss of an RCA trust under the arrangement from a business or property for the year or a preceding taxation year or a capital loss of the trust for the year or a preceding taxation year,
c) 50% of all amounts paid as distributions to one or more persons (including amounts that are required by paragraph 12(1)(n.3) to be included in computing the recipient's income) under the arrangement while it was a retirement compensation arrangement and before the end of the year, other than a distribution paid where it is established, by subsequent events or otherwise, that the distribution was paid as part of a series of payments and refunds of contributions under the arrangement;
Your first question is whether the costs related to the administration of the RCA can be deducted in calculating the RCA's "losses from business and property" as required by subparagraph 207.5(1)(b)(ii) of the Act. You have given as examples the costs associated with distributing pensions, financial statement preparation and collection of employer contributions. As you noted, the RCA's losses from business and property are referenced at Lines 13 and 14 of the T3RCA.
It is our position that although expenses relating to the administration of the RCA trust are generally paid by and deductible to the employer, when the RCA trust is responsible for such expense, there is no deduction from its income to reflect this expense for purposes of Part XI.3 of the Act. Administrative fees of the sort you have described are not an expense of earning income from business or property. We note that investment management expenses relating to the property in the RCA are properly charged against the RCA trust's income for the purpose of computing the refundable tax.
Your second question requested our comments on what constitutes a "distribution" from an RCA. Specifically, you asked whether a refund to a member is considered a distribution.
The determination of whether any payment out of or under an RCA would constitute a distribution by the RCA trust for purposes of the Act is a question of fact. Where an amount or property is paid to a person as a benefit out of an RCA trust under the terms
of the RCA plan or arrangement, the amount paid out would constitute a distribution for purposes of paragraph 207.5(1)(c) of the Act. This would be the case whether the distribution is made to an employee or former employee who has to include such amounts
in income under paragraph 56(1)(x), (y) or (z) of the Act or to an employer who has to include the amount in its income under paragraph 12(1)(n.3) of the Act. Generally, however, a distribution would not include an amount paid by the RCA trust as a capital outlay or expense in respect of property held by the RCA trust.
It is our opinion that a refund to a member would constitute a distribution from the RCA. As noted on page 12 of the RCA Guide, a T4A-RCA, "Statement of Distributions from a Retirement Compensation Arrangement" must be completed for amounts refunded by the RCA to either the employer or an employee.
We trust that these comments will be of assistance.
Roberta Albert, C.A.
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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