23 September 2004 External T.I. 2003-0039011E5 - Amending an 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.

SUBJECT: Amending an Employee Benefit Plan

Principal Issues: What are the possible tax consequences of amending an EBP to provide for the payment of amounts to an employee who is the only beneficiary of the EBP?

Position: Question of fact.

Reasons: The possible tax consequences will depend upon the facts in a particular fact situation.

XXXXXXXXXX 					2003-003901
G. Allen

September 23, 2004

Dear XXXXXXXXXX:

Re: Amendment to an Employee Benefit Plan ("EBP")

We are writing in reply to your letter dated September 12, 2003 concerning the income tax consequences of amending an EBP that has been established for one employee of an employer.

Based on the information provided in your letter, it is our understanding that the EBP was established and one contribution was made to the EBP on XXXXXXXXXX. No subsequent contributions have been made to the EBP. The terms of the EBP provide for the payment of the annual income from the EBP to the employee. You are enquiring as to the tax consequences of amending the EBP to provide for a schedule of payments that will exhaust the EBP's assets by the last payment date.

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, including all the pertinent information. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to provide the following general comments. All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.htm l.

It is a question of fact whether a particular arrangement satisfies the definition of EBP in subsection 248(1) of the Income Tax Act (the "Act") such that distributions from the arrangement are taxable in accordance with paragraph 6(1)(g) of the Act. In general, an amount will be included in an employee's income in accordance with paragraph 6(1)(g) of the Act at the time that an amount has been received by the employee out of an EBP or at the time that the employee has constructively received a payment from the EBP, whichever time is earlier.

The determination of whether constructive receipt exists in a specific situation is a question of fact, the resolution of which would require a review of all the relevant facts, including a review of the terms of an EBP. The CRA's general views concerning constructive receipt are outlined in paragraph 10 of IT-502 Employee Benefit Plans and Employee Trusts and can also be found in our response to question 13 at the CRA Round Table published in the 1984 Conference Report wherein it states:

"The Department considers an amount to have been received by an employee upon the earlier of the date upon which payment is made and the date upon which the employee has constructively received a payment. Constructive receipt is considered to occur in situations where an amount is credited to an employee's debt or account, set apart for the employee, or otherwise available to the employee without being subject to any restriction concerning its use."

In our view, constructive receipt in a particular year would occur, for example, where the employee has access to an amount in the year but simply chooses to receive it in a later year. However, in a situation where the facts disclose that the employee has no legal right to receive the amount in a particular year, the mere deposit by the employer of the amount into a trust, which was not under the direction of the employee but as a result of the agreement of both parties (the employer and employee), would not, by itself, result in entitlement to an amount or its constructive receipt (see James R. Crighton 91 DTC 511 (TCC)).

Prior to 1987, funded unregistered plans established by an employer to provide retirement benefits to its employees were EBPs. Where an EBP in existence on October 8, 1986 would have been a retirement compensation arrangement ("RCA") as defined in subsection 248(1) of the Act, but for the fact that it was established on or before that date, the Act deems that a separate plan, referred to as a "statutory arrangement", was established on the earlier of January 1, 1988 and the date of any material changes to the terms of the employee benefit plan. This "statutory arrangement" is deemed to be an RCA and all contributions made to it after it was established, as well as all property that can reasonably be considered to derive from those contributions, are deemed to be property held in connection with the RCA and not in connection with the existing EBP. In effect, contributions to an EBP after the date that is the earlier of:

1) December 31, 1987; or,

2) where there has been a material change after October 8, 1986 and before January 1, 1988, the date of the material change,

and earnings on those contributions, are subject to the RCA rules. Contributions to an EBP before that date, and earnings thereon, remain subject to the rules governing an EBP.

We trust the above comments will be of assistance.

Yours truly,

Roberta Albert, CA
Manager
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch