7 September 2004 External T.I. 2004-0067871E5 - Cessation of an 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.

Principal Issues: How will CRA assess the distributions from and refundable tax in respect of a plan or arrangement that purports to be an RCA but ceases to exist before retirement, loss of employment or a substantial change in employment services rendered by the employee?

Position: Question of fact.

Reasons: The wording of the definition of a RCA in subsection 248(1) of the Act requires that the plan or arrangement be funded in connection with benefits that are to be, or may be, received or enjoyed on, after or in contemplation of a substantial change in services rendered, retirement or loss of employment.

XXXXXXXXXX 2004-006787
P. Kohnen
September 7, 2004

Dear XXXXXXXXXX:

Re: Technical interpretation - Cessation of an RCA

This is in reply to your submission of March 15, 2004, requesting our comments regarding the application of certain provisions under the Income Tax Act (the "Act") to a scenario involving an early cessation of a retirement compensation arrangement ("RCA") due to evolving factors.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. For more information concerning advance tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. Copies of information circulars, guides and pamphlets are available at your local Tax Services Office or on the Internet at http://www.ccra-adrc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments, which may be of assistance.

Our Comments

Subject to certain listed exclusions, an RCA is defined in subsection 248(1) of the Act as a plan or arrangement under which contributions are made by an employer or former employer of a taxpayer to another person (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. As is noted in the 1987 Department of Finance technical notes in regard to the RCA definition "An RCA is a plan or arrangement under which an employer makes payments to another person, called a custodian, in order that benefits may be paid to an employee or any other person after the employee retires or otherwise severs his employment with the employer".

The determination of whether a particular plan or arrangement was entered into with an intention of funding benefits that may be paid after retirement or the severing of or substantial change in employment services rendered will depend upon the unique facts in a given situation. If the facts lead to a conclusion that the plan or arrangement was entered into with the intention of paying, or allowing for the discretionary payment of benefits before a termination of employment, where there has been no substantial change in the services rendered by the employee, the plan or arrangement may not qualify as an RCA, as defined in subsection 248(1) of the Act.

The fact that a plan or arrangement that purports to be an RCA when it is first set up and receives contributions, exists for several years before being terminated, in our view, would not, in and of itself, lead to a definitive determination as to whether the plan or arrangement was or was not an RCA. As was noted above, such a determination may only be made after considering all of the relevant facts in a given situation.

Where a plan or arrangement is, in fact, established with a legitimate intent to fund retirement benefits, and a decision is subsequently made to terminate the plan or arrangement early, due to factors unforeseen at the outset (such as a corporate takeover or unexpectedly high plan administration and funding expenses), in our view, the plan or arrangement should not generally cease to be an RCA due to the premature termination.

In your submission, you enquired as to how the Canada Revenue Agency would apply the definition of "refundable tax" in subsection 207.5(1) of the Act, as well as the provision that allows for a refund of refundable tax under subsection 207.7(2) and the taxation of amounts received by the employee or another person out of or under an RCA, pursuant to paragraph 56(1)(x) of the Act, to such a plan or arrangement that was terminated early. The application of these provisions of the Act would be predicated on a determination that the plan or arrangement was, in fact, an RCA. However, in a situation in which factually, a plan or arrangement was an RCA up to and at the time of termination, in our view, the above provisions of the Act should continue to apply.

Should you wish to verify whether the proposed wind-up of a specific plan or arrangement would cause it to cease to be an RCA, you may consider submitting a request for an advance income tax ruling.

We trust that the above comments will be of assistance to you.

Yours truly,

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