2004 Ruling 2003-0030731R3 - Employee Benefit 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.

Principal Issues:

Whether the funding of a survivor benefits plan would be an RCA or an EBP?

Position:

The Plan will constitute an EBP.

Reasons:

The benefits payable under the Plan are payable only upon death of a Plan member and are considered to be a "death benefit" as defined under subsection 248(1).

XXXXXXXXXX 							2003-003073

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge your letters dated of XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:

(i) in an earlier return of the taxpayer or a related person,

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,

(iii) under objection by the taxpayer or a related person,

(iv) before the courts, or

(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

This letter is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and the proposed transaction.

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

Definitions and Abbreviations

"Basic Pension" means the single life equivalent of the pension received by a Pensioner under the Pension Plan.

"Child" means any single, natural or legally adopted children of a Member or of the Member's Spouse or of a minor dependent of the Member, who depends on the Member for livelihood and who meets at least one of the following conditions:

a) Is under XXXXXXXXXX years of age;

b) Is under XXXXXXXXXX years of age and attending an educational institution on a full-time basis;

c) Is totally and permanently disabled, having become so while still considered to be a Child under a) or b) above.

The term "Child" excludes any child who qualifies under the above definition only after the Member has become a Pensioner.

"Common-law Spouse" means a person of the opposite sex whom the Member has publicly acknowledged as spouse for a continuous period of at least three years.

"Company" means XXXXXXXXXX.

"Disabled Employee" means an Employee who is in receipt of benefits under the Long-Term Disability Plan of the Company.

"Employee" means a permanent, regular, full-time employee of the Company. It does not include part-time, temporary or casual employees.

"Member" means an Employee, Disabled Employee or Pensioner who has been enrolled in the XXXXXXXXXX.

"Pension Plan" means the XXXXXXXXXX of the Company, as amended from time to time.

"Pensioner" means a former Employee who is in receipt of a retirement pension under the terms of the Pension Plan.

"Plan" means the XXXXXXXXXX.

"Salary" means:

a) for XXXXXXXXXX staff - XXXXXXXXXX% of the average of the XXXXXXXXXX highest annual earnings received from the Company in the last XXXXXXXXXX complete XXXXXXXXXX years; such annual earnings shall consist of annual basic remuneration, XXXXXXXXXX and XXXXXXXXXX commission. If a Member has less than XXXXXXXXXX years' service, Salary will be calculated using the annual earnings received in the Member's actual number of complete XXXXXXXXXX years. A XXXXXXXXXX year shall be the period commencing on XXXXXXXXXX of any year and ending on XXXXXXXXXX of the following year.

b) for XXXXXXXXXX staff whose remuneration combines salary and incentive compensation - the yearly fixed salary in the last year of employment with the Company plus the average annual incentive compensation paid over the best XXXXXXXXXX years in the last XXXXXXXXXX complete XXXXXXXXXX years or such lesser period during which incentive compensation was payable. It will exclude any other bonus, overtime or additional allowance. A XXXXXXXXXX year shall be the period commencing on XXXXXXXXXX of any year and ending on XXXXXXXXXX of the following year.

c) for any other Employee - the fixed annual salary in the last year of employment with the Company plus the average bonus, if any, paid for the last XXXXXXXXXX years of employment or the actual period of employment if less than XXXXXXXXXX years.

d) for a Disabled Employee - the Salary at the date of commencement of disability benefit payments, adjusted to take account of the increases granted in the disability benefit.

"Service" means a continuous period as an Employee or a Disabled Employee.

"Spouse" means the legally married or Common-law Spouse of a Member as at the date of the Member's retirement or earlier death. If the Member has both a legally married spouse and a Common-law Spouse, the Common-law Spouse shall be deemed to be the Spouse for the purposes of the Plan. No Spouse's benefits are payable under the Plan in respect of any person who did not qualify as the Spouse at the date of retirement of the Member who dies as a Pensioner.

Facts

1. The Company is incorporated by a XXXXXXXXXX and its head office for Canada is located in XXXXXXXXXX. The Company is in the business of XXXXXXXXXX.

2. The Company maintains various plans for the benefit of its employees and their dependents. One of those plans is the Plan. The Plan was established in XXXXXXXXXX by the Company at its head office in XXXXXXXXXX as an irrevocable trust under a Declaration of Trust (the "XXXXXXXXXX Declaration of Trust"). The stated purpose of the Plan was to provide a pension scheme for the widows and orphans of certain persons in the employment of the Company in Canada.

3. The XXXXXXXXXX Declaration of Trust and the rules of the Plan have been amended on several occasions. Clause XXXXXXXXXX of the XXXXXXXXXX Declaration of Trust as amended for the last time in XXXXXXXXXX provides the following:

"XXXXXXXXXX".

4. Although the Declaration of Trust contemplated a trust fund, the Plan has always been unfunded and operated on a "pay-as-you-go" basis.

5. Throughout the existence of the Plan, the purpose of the Plan has been to provide death benefits to spouses and children of deceased Employees or Pensioners of the Company.

6. The relevant rules of the Plan as amended for the last time to XXXXXXXXXX are as follows:

a) Each Employee or Disabled Employee is automatically enrolled in the Plan after XXXXXXXXXX complete years of Service.

b) The entire cost of the Plan is borne by the Company.

c) The Spouse of a Member who dies while an Employee will receive an annual benefit, payable for life, of XXXXXXXXXX percent of the Member's Salary at the date of death.

d) The Spouse of a Member who dies while a Disabled Employee will receive an annual benefit, payable for life, of XXXXXXXXXX percent of the Member's Salary at the date of death.

e) The Spouse of a Member who dies as a Pensioner will receive an annual benefit, payable for life, of XXXXXXXXXX of the Member's Basic Pension at the date of death.

f) If a Member dies and is survived by at least one Child, the benefit payable in respect of each such Child, to a maximum of XXXXXXXXXX, shall be XXXXXXXXXX of the Member's Basic Pension, if a Pensioner, otherwise XXXXXXXXXX percent of the Member's Salary. The last benefit payment in respect of any Child shall be made on the XXXXXXXXXX of the month coincident with or immediately preceding the date on which the definition of "Child" is no longer satisfied. If there are more than XXXXXXXXXX Children on any payment date, the benefit payable shall be divided equally among them.

g) If a Member dies with no surviving Spouse, the benefit described in f) shall be XXXXXXXXXX.

h) If a surviving Spouse dies while a Child is receiving benefits under f), that benefit shall be XXXXXXXXXX commencing on the payment date coincident with or next following the death of the Spouse.

i) Benefits payable in respect of the Child of a Member who died before XXXXXXXXXX shall continue as long as the definition of "Child" is satisfied.

j) A Member who is transferred to the permanent staff of the Company in another country, or who ceases to be an Employee or Disabled Employee, other than by becoming a Pensioner, shall cease to be a Member immediately upon such transfer or cessation.

k) A Member may not withdraw from the Plan while still qualified as a Member.

l) The Company has the right to amend or discontinue the Plan by resolution of the Directors. However, benefits in the course of payment at the date of amendment or discontinuance shall not be affected.

m) No person shall have any right, title or claim in respect of the Plan, or against the Trustee or the Company, except in accordance with the terms of the Plan.

7. Effective XXXXXXXXXX, the Company terminated the Plan in respect of its active Employees and Pensioners. The Plan continues to operate in respect of the Company's payment obligations to all Spouses and Children who were entitled to benefits under the Plan as at XXXXXXXXXX.

8. The Company files its income tax returns with the XXXXXXXXXX Tax Centre and is located within the area serviced by the XXXXXXXXXX Tax Services Office.

Proposed Transaction

9. The Company proposes to settle and secure its outstanding obligations under the Plan (as described in paragraph 7 above) by setting up a trust account to which it would deposit the funds necessary to satisfy the above obligations. The monies deposited would be invested in order to provide for the promised benefits.

Purpose of the Proposed Transaction

10. The purpose of the proposed transaction is to provide funding and, hence, security for the Company's remaining obligations under the Plan.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction and the purposes of the proposed transaction, we rule as follows:

A. The funding of the obligations under the Plan will not constitute a "retirement compensation arrangement" as that term is defined in subsection 248(1) of the Act.

B. The funding of the obligations under the Plan will constitute an "employee benefit plan" as that term is defined in subsection 248(1) of the Act.

The above advance income tax 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 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided the proposed transaction is implemented before XXXXXXXXXX.

Yours truly,

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