5 January 2005 External T.I. 2004-0082991E5 - RCA for Recently Incorporated Professional

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: Can periods of time before a professional incorporates his or her practice be considered in determining the benefits to be provided under an RCA?

Position: No, these periods are not relevant.

Reasons: Paragraph 20(1)(r) requires that employer contributions must be in respect of services rendered by an employee or former employee.

XXXXXXXXXX 							2004-008299
P. Kohnen, CMA
January 5, 2005

Dear XXXXXXXXXX:

Re: Technical Interpretation - RCA for Recently Incorporated Professional

This is in response to your submission of June 25, 2004 in which you requested our comments with respect to whether it would be acceptable to include the period of time during which a recently incorporated professional operated his practice as a sole proprietor before incorporation, when determining the amount of benefits which a retirement compensation arrangement ("RCA") may provide.

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. 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 Income Tax Act (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.

The Act does not specifically dictate what level of benefits may be provided under an RCA. However, an employer may only deduct amounts paid in the year as contributions under an RCA to the extent that the conditions in paragraph 20(1)(r) are met. Paragraph 20(1)(r) provides that the contributions must be made in respect of services rendered by an employee or former employee of the taxpayer. This requirement that the contributions be made "in respect of services rendered" can be satisfied by either current or past service contributions, and may relate to services rendered prior to the year in which the RCA is established, however, any such services must be employment services rendered by the member. Furthermore, pursuant to section 67 of the Act, a deduction in respect of any such contribution is available only to the extent that the expense was reasonable in the circumstances.

The determination of whether a particular contribution to an RCA is reasonable is a question of fact. We can only make this determination where all of the facts and proposed transactions are disclosed in a submission for an advance income tax ruling. However, given the requirements of paragraph 20(1)(r) and of section 67 of the Act, as noted above, in our view, the period during which the RCA member operated his practice as a sole proprietor before incorporation would have no relevance in determining what constitutes a reasonable contribution in respect of benefits provided under the arrangement.

The above comments are equally applicable to a scenario under which an RCA is set up for a former non-professional proprietor who subsequently incorporates his or her business.

We trust that the above comments will be of assistance to you. Please do not hesitate to contact Mr. Phil Kohnen at (613) 957-2093 should you require further information.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate