1 June 2004 External T.I. 2004-0063341E5 - Employee savings 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: Is a particular employee savings plan a retirement compensation arrangement?

Position: Question of fact.

Reasons: General comments provided.

2004-006334
XXXXXXXXXX Renée Shields
(613) 948-5273
June 1, 2004

Dear XXXXXXXXXX:

Re: Employee Savings Plan

This is in response to your letter of February 19, 2004 inquiring about the characterization and tax treatment of payments from a particular savings plan for status Indian and non-status Indian employees of XXXXXXXXXX.

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 Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca.

Although we cannot comment specifically on the plan, we note that plans of the nature described would generally be either a salary deferral arrangement ("SDA"), retirement compensation arrangement ("RCA") or an employee benefit plan ("EBP"), depending upon the provisions of the plan.

Basically, subject to certain exclusions, an SDA is an arrangement under which a person has a right to receive an amount in the year that would otherwise be salary or wages after the year and one of the main reasons for this arrangement is to postpone taxes payable on such salary and wages. Whether an arrangement is an SDA would be a question of fact to be determined following a review of all relevant documentation and the circumstances surrounding the establishment of the arrangement.

Pursuant to subsection 6(11) of the Income Tax Act (the "Act"), an employee's SDA benefit is taxed as income from office or employment in the year of deferral.

The CRA's general views regarding RCAs are contained in the Retirement Compensation Arrangements Guide (T4041). Subject to certain exclusions, an RCA is a plan or arrangement under which an employer makes payments to another person, called a custodian, in connection with benefits that may be paid to an employee or any other person after the employee retires or otherwise severs his employment with the employer or as a consequence of any substantial change in services rendered by an employee. Whether this connection exists in any particular case is a question of fact that can only be determined upon a review of all relevant documentation and the circumstances surrounding the establishment of the plan or arrangement.

An employer's contributions to an RCA are deductible pursuant to paragraph 20(1)(r) of the Act. An employer is required to withhold and remit to the CRA 50% of any contribution made to the custodian of an RCA, to be held in a non-interest bearing refundable tax account. Furthermore, the RCA custodian is required to pay to the CRA 50% of any earnings of the RCA. The tax may be refunded as a consequence of distributions being made out of the RCA to a beneficiary at the rate of $1 of refundable tax to every $2 of distribution.

Employee contributions to an RCA are deductible under paragraph 8(1)(m.2) of the Act.

Subject to the comments below regarding status Indians, benefits received from an RCA are taxed to the employee under paragraph 56(1)(x) of the Act and reported on a T4-RCA in the year of distribution. Distributions from an RCA to a beneficiary of the RCA are subject to income tax withholdings. The RCA itself is required to complete and file a T3-RCA tax return no later than 90 days after the end of each calendar year.

Subject to certain exclusions, an EBP is an arrangement under which an employer makes contributions to a custodian for the benefit of employees or former employees. The CRA's general views regarding EBPs are contained in Interpretation Bulletin IT-502, Employee Benefit Plans and Employee Trusts.

An employer does not get a deduction at the time of making a contribution to an EBP. Rather, pursuant to section 32.1 of the Act, an employer is entitled to a deduction in respect of EBP contributions to the extent that an employee receives a taxable distribution.

Subject to the comments below regarding status Indians, amounts received by an employee out of an EBP are taxed in the year of receipt as income from an office or employment under paragraph 6(1)(g) of the Act and reported on a T4. However, the amount that represents a return of his/her own contributions to the EBP is not included in income. As indicated in paragraph 19 of IT-502, amounts paid out of an EBP are considered to be:

·	first, a return of EBP beneficiary [employee] contributions,
·	second, a distribution of plan income for the year,
·	third, a distribution of employer contributions, and
·	fourth, a distribution of the EBP's prior year income.

Distributions from an EBP are subject to income tax withholdings but no CPP or EI withholdings are required on these payments.

Where an EBP is a trust, it is taxable under section 122 of the Act on its income determined in accordance with Part I of the Act. The trust includes in gross income the amount of income from the investment of trust property and other income incidental to the operation of the trust. Contributions are not included in the trust's gross income. Expenses incurred in the year in earning investment or other income of the trust, expenses of the trust's normal operation that are not otherwise expressly disallowed under the Act and amounts paid in the year to beneficiaries out of the current year's trust income may be deducted in determining the trust's income for the year. Distributions to beneficiaries that represent payments out of contributions or out of prior years' accumulated income are not deductible by the trust. Where gross income exceeds $500 in the taxation year, the trust must file form T3, Trust Information Return and Income Tax Return.

Payments to status Indians

A status Indian's employment income (which, as noted above, can include amounts received from an SDA or an EBP) may be tax exempt pursuant to section 87 of the Indian Act and paragraph 81(1)(a) of the Act if the facts of the particular situation fit within one of the Indian Act Exemption for Employment Income Guidelines (the "Guidelines").

The Guidelines can be summarized very generally as follows:

Guideline 1 would apply to exempt all of the income of a status Indian if at least 90% of the employment duties are performed on a reserve. When less than 90% of the duties are performed on a reserve and none of the other Guidelines apply, only the portion that is performed on a reserve is exempt from tax (the proration rule).

Guideline 2 would apply to exempt the employment income of status Indian employees who live on a reserve provided that the employer is also resident on a reserve.

Guideline 3 would apply to exempt all of the income of a status Indian if two conditions are met. Firstly, more than 50% of the employment duties must be performed on a reserve. Secondly, either the employer must be resident on a reserve or the status Indian must live on a reserve.

Guideline 4 requires that the employer be resident on a reserve. It also requires that the employer is an Indian band which has a reserve, or a tribal council representing one or more Indian bands which have reserves, or an Indian organization controlled by one or more such bands or tribal councils, if the organization is dedicated exclusively to the social, cultural, educational, or economic development of Indians who for the most part live on reserves, and that the duties of the employment are in connection with the employer's non-commercial activities carried on exclusively for the benefit of Indians who for the most part live on reserve. These elements must all be satisfied in order for Guideline 4 to apply.

Certain other types of income related to employment, such as distributions from an RCA, are treated in the same way as the employment income that gave rise to the particular income. In other words, if an individual's employment income is exempt from income tax the employment-related income will also be exempt. If part of the employment income is exempt, any employment-related income arising from that exempt income will also be exempt from income tax.

We trust that these comments will be of assistance.

Yours truly,

Roxane Brazeau-LeBlond, C.A.

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