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: Will a portion of a company's supplemental executive retirement plan be a retirement compensation arrangement for purposes of the Income Tax Act?
Position: Yes.
Reasons: The arrangement described satisfies the definition of RCA in subsection 248(1) of the Act.
XXXXXXXXXX 2004-009963
XXXXXXXXXX , 2007
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX . (the "Company") (XXXXXXXXXX )
This letter is in reply to your letters dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-referenced Company and further to numerous telephone conversations and email exchanges (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the above-referenced taxpayer, none of the issues involved in the ruling request is:
(i) in an earlier return of the Company or a related person;
(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Company or a related person;
(iii) under objection by the Company or a related person;
(iv) before the courts; nor,
(v) the subject of a ruling previously issued by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (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.
Definitions
"Beneficiary" means the person or persons designated from time to time by a Member, in accordance with Company policies, to receive any benefits which may become payable under the RCA after the Member's death, and in the absence of such designation, means the estate of such Member.
"Board of Directors" means the board of directors of the Company.
"CRA" means the Canada Revenue Agency or any successor thereto.
"DPSP" means a deferred profit sharing plan as defined under the Act.
"DPSP Limit" means, in respect of a Member and for a given calendar year, the maximum contribution amount allowed to be made to a DPSP in accordance with subsection 147(5.1) of the Act.
"Earnings" means, in respect of a Member and a given period, the base pay paid in the period to the Member by the Company.
"Effective Date" means XXXXXXXXXX , subject to the receipt of a favourable advance tax ruling from the CRA.
"Group RRSP" means the group registered retirement savings plan benefit program that has been established for employees of the Company, as amended from time to time.
"Inactive Member" means a Member who ceases to be an active member under the SERP in accordance with 8 below as determined by the Board of Directors.
"Investment Manager" means such corporate trust company or other legal entity as the Company may from time to time appoint for the purpose of investing the assets of the Trust Fund.
"Member" means an employee of the Company who has been appointed by the Board of Directors to participate in the SERP in accordance with 5, 6 or 7, as the case may be, and who has not ceased to be a Member under the SERP, and shall include an Inactive Member for all purposes of this SERP subject to the limitations relating to Inactive Members set forth herein.
"Original Member" means a Member who has been appointed by the Board of Directors to participate in the SERP effective as of the Effective Date.
"Plan Year" shall mean in the initial year the period commencing on the Effective Date and ending XXXXXXXXXX and in all subsequent years the period commencing on XXXXXXXXXX and ending on XXXXXXXXXX.
"Profit Sharing Plan" means the profit sharing plan established by the Company for the purpose of sharing its profits with all eligible employees, as amended from time to time.
"RCA" means in respect of any particular Member, the retirement compensation arrangement and the Trust Agreement established for the Member as amended from time to time in accordance with the provisions hereof and the provisions of the Trust Agreement.
"Refundable Tax" means the amount of refundable tax as calculated in accordance with subsections 207.5(1) or 207.5(2) of the Act.
"Refundable Tax Account" means, in respect of any particular Trust Fund, the tax account maintained by CRA to which Refundable Tax in respect of such Trust Fund is remitted.
"SERP Earnings Limit" shall mean, in respect of a calendar year, the defined benefit limit as defined under Section 8500 of the Income Tax Regulations (the "Regulations") as amended from time to time, divided by XXXXXXXXXX.
"Trust Agreement" shall mean, in respect of any particular Trust Fund, the agreement entered into between the Company and the Trustee establishing such Trust Fund, as amended from time to time.
"Trustee" shall mean the firm or individual persons, as appointed by the Company from time to time, to hold and administer the whole or a portion of each Trust Fund in accordance with the terms and provisions of the Trust Agreement.
"Trust Fund" shall mean, in respect of any particular Member, the individual fund established for such Member, pursuant to the Trust Agreement, to which the Company makes contributions and from which benefits under the RCA are to be paid and, for greater clarification, includes amounts in respect of the Refundable Tax Account.
"Vested RCA Entitlement" means, in respect of a particular Member at a particular time, the Member's existing benefit entitlement in respect of the RCA at such time, where vesting under the RCA is determined in accordance with 21, 22, 23, 24 or 25, whichever is applicable.
Facts
1. The Company is registered in the province of XXXXXXXXXX and it operates in the XXXXXXXXXX.
2. The Company's address is XXXXXXXXXX and their business number is XXXXXXXXXX. The Company files its tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office.
3. The Company currently sponsors a Profit Sharing Plan for all employees known as the Company Profit Sharing Plan. The primary purpose of the Profit Sharing Plan is to allow the Company, when profits permit, to assist employees in the accumulation of their retirement savings.
Proposed Plan
4. It is desired that certain Company employees (Members) be provided with additional retirement savings assistance through a supplemental executive retirement plan referred to as the Retirement Compensation Arrangement for Employees of the Company (the "SERP"). It is intended that a portion of the SERP would be administered as an RCA as defined under the Act.
5. The Board of Directors may, in its sole discretion, appoint any person regularly employed by the Company in an executive position (or in any other position as the Board of Directors in its sole discretion may determine) to participate in the SERP.
6. Subject to 7 below, a person appointed to participate in the SERP in accordance with 5 above shall become a Member of the SERP immediately upon being appointed by the Board of Directors, or at such time as may otherwise be determined by the Board of Directors.
7. Notwithstanding 5 and 6 above, a person appointed to participate in the SERP in accordance with 5 above who does not agree to be bound by all terms and conditions of the SERP and provide any and all information that may be required by the Company in order to provide for the proper administration of the SERP shall not become a Member.
8. If a Member has moved or been transferred from the position in which he was employed by the Company at the time he became a Member to a different position and as a result there is a substantial change in the services he renders to the Company, such Member shall become an Inactive Member immediately upon such move or transfer. Such move or transfer shall not terminate the Inactive Member's participation in the SERP, but no further contributions will be made by the Company in respect of the RCA for an Inactive Member.
9. In respect of a given calendar year the Company shall, in respect of each Member, provided that the Member has not become an Inactive Member in the year in question, contribute an amount to the SERP on behalf of such Member equal to the following:
A minus B
where:
A equals XXXXXXXXXX% of the Member's Earnings for the given calendar year, provided that for XXXXXXXXXX the Earnings of an Original Member for the purposes of such calculation shall be deemed to be that portion of the Earnings paid to the Original Member after the Effective Date; and
B equals XXXXXXXXXX% of the amount contributed by the Company in respect of the Member to the Profit Sharing Plan.
Notwithstanding the above, if the amount determined by the above formula is a negative number then the amount shall be deemed to be zero.
10. In respect of a given calendar year the Company shall, in respect of each Member, allocate the amount contributed in accordance with 9 above on behalf of such Member in the following manner:
(a) to the Member's DPSP account under the Profit Sharing Plan. The amount allocated and contributed to the Member's DPSP account will not, in conjunction with any amounts remitted to the Member's DPSP account under the Profit Sharing Plan, exceed the DPSP Limit for the given calendar year; and
(b) any portion of the contribution determined in accordance with 9 and not allocated under 10(a) is to be then allocated and contributed to the Member's Trust Fund under the RCA. Notwithstanding the foregoing, the amount allocated to the RCA cannot exceed XXXXXXXXXX% of the Member's Earnings in excess of the SERP Earnings Limit in such calendar year.
(c) any portion of the contribution determined in accordance with 9 and not allocated and contributed under 10(a) and 10(b) will then be allocated and contributed to the Member's Group RRSP account under the Profit Sharing Plan.
11. The Trustee shall administer each Member's Trust Fund in accordance with the terms and provisions of the Trust Agreement.
12. In respect of a given Member and calendar year, the contributions described in 10(b) (less the Refundable Tax payable in respect of such contributions) shall be paid to the Trustee for deposit in the Member's Trust Fund within XXXXXXXXXX days following the end of the given calendar year.
13. At the same time that the contributions described in 10(b) are paid to the Trustee, the Company shall pay the Refundable Tax in respect of such contributions to the Member's Refundable Tax Account.
14. A record of each Member's Trust Fund shall be maintained or caused to be maintained by the Company. Such records shall be maintained on a calendar year basis.
15. The Trustee shall invest the assets contained in each Member's Trust Fund which are not part of the Refundable Tax Account in accordance with the instructions provided by the Investment Managers.
16. A Member's Trust Fund shall be credited with all contributions made in accordance with 10(b), all earnings and profits derived from investments made therewith and all entitlements to and all amounts received on account of Refundable Tax from the Member's Refundable Tax Account. A Member's Trust Fund shall be debited with all losses on investments, investment related expenses incurred by the Member's Trust Fund, and all authorized amounts which have been paid or disbursed (whether out of capital or income) in the normal course of the administration of the Trust Fund.
17. A Member's Refundable Tax Account shall be debited and credited with all appropriate amounts in accordance with part XI.3 of the Act.
18. The Member's Trust Fund shall not form any part of the revenue or assets of the Company. No person shall have any interest in or right to the Member's Trust Fund or any part thereof, except as expressly provided in the RCA. No liability for the payment of benefits under the RCA shall be imposed upon the Company, or the officers, directors or shareholders of the Company.
19. The Company shall have sufficient authority as to ensure the implementation of the RCA, and shall advise the Trustee of the occurrence of any event that will require the payment of benefits to the Members or their Beneficiaries.
20. Subject to 23 below, any payment in respect of a Member from the RCA in accordance with 21, 23, 24, or 28 below shall be made from the Member's Trust Fund, with all amounts in the Member's Trust Fund, including any refunds owing to the Member's Trust Fund from the Refundable Tax Account, to be paid to the Member or Beneficiary, as the case may be, and such payment shall result in a full settlement of the benefits owing in respect of the Member under the RCA and thereby cause the termination of the Member's Trust Fund. For greater certainty, following such payment the Member shall cease to be a Member.
21. The Trust Fund relating to a Member described in 26 below who is not an Original Member shall be terminated on the date of the Member's retirement, termination of employment or death as the case may be and all amounts in the Trust Fund, including any refunds owing to the Trust Fund from the Refundable Tax Account, shall be paid to the Company. For greater certainty, following such payment the Member shall cease to be a Member.
22. An Original Member or a Member who has completed at least XXXXXXXXXX full years of membership in the RCA, and who retires or terminates employment, shall receive within XXXXXXXXXX days of the date of retirement or termination of employment, a lump sum cash payment from the RCA equal to the value of the Member's Trust Fund determined in accordance with the terms of the RCA.
23. Notwithstanding 22 above, where an Original Member or another Member retires and such Member is eligible to receive the lump sum cash payment described in 22 above, the Original Member or Member may instead, within XXXXXXXXXX days of the retirement date, make application to the Company to receive the value of the Member's Trust Fund in equal and periodic payments. The Company may, in its sole discretion, agree to such periodic payments, provided that the period of such payment does not exceed XXXXXXXXXX years, and the payments do not extend beyond the end of the calendar year in which the Original Member or Member attains XXXXXXXXXX years of age. In the event that the Member elects to receive payments on an equal and periodic basis and the Company so agrees, such payments will be made on an annual basis, with the first payment being made on the Member's retirement date. Subsequent payments will be made on XXXXXXXXXX in each successive year during the remaining period.
24. Where an Original Member or a Member is receiving equal and periodic payments from the Member's Trust Fund in accordance with 23 above and the Original Member or Member subsequently requests, the Company may direct that any unpaid balance of the Member's Trust Fund be paid as a lump sum cash payment from the RCA.
25. If an Original Member or a Member who has completed at least XXXXXXXXXX full years of membership in the RCA dies while in active service or while receiving equal and periodic payments from the Member's Trust Fund in accordance with 23 above, the Member's Beneficiary will receive, within XXXXXXXXXX days of providing notification of the Member's death to the Company, a lump sum cash payment from the RCA equal to the value of the Member's Trust Fund determined in accordance with the terms of the RCA.
26. If a Member retires, terminates employment or dies, before completing XXXXXXXXXX full years of membership in the RCA, no benefits shall be paid under the terms of the RCA. However, this paragraph shall not apply to Original Members who shall be entitled to all benefits payable under the terms of the RCA regardless of their years of membership in the RCA.
27. Notwithstanding anything else contained herein, the Trustee shall not pay any benefits under the RCA in a manner that contravenes the Act.
28. The Company retains the right to amend or modify the SERP, in whole or in part, through a resolution of the Board of Directors, at any time and from time to time in such manner and to such extent as it may deem advisable, provided that no amendment will:
(a) cause the amount allocated to the RCA to exceed the limit contained in 10(b),
(b) cause the RCA to not satisfy the definition of RCA in subsection 248(1) of the Act, or
(c) have the effect of reducing any Member's or Beneficiary's Vested RCA Entitlement.
Upon the amendment or modification of the SERP, the Members will be immediately notified.
29. The Company retains the right to terminate the SERP, in whole or in part, at any time and from time to time in such manner and to such extent as it may deem advisable, provided that the termination will not have the effect of reducing any Member's or Beneficiary's Vested RCA Entitlement.
30. The administration of the SERP shall be the responsibility of the Company.
31. The Company shall advise the Trustee of the occurrence of any event that will require the payment of benefits to the Members or their Beneficiaries in accordance with the terms of the RCA.
32. For greater clarification a Member may not make any withdrawals from the RCA or from the Member's Trust Fund while the Member remains in the employment of the Company or is on leave of absence with or without pay.
Purpose of the Proposed Plan
33. The primary purpose of the SERP is to provide an arrangement under which contributions are made by the Company in connection with benefits for a Member (or for a Member's designated Beneficiary or Beneficiaries after a Member's death) on, after or in contemplation of any substantial change in the services rendered by the Member to the Company, the retirement of the Member or the loss of an office or employment of the Member. The benefits provided under the SERP are intended to provide retirement savings in addition to the current retirement programs sponsored by the Company.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed plan and purpose of the proposed plan, and provided that the proposed plan is as described above, we rule as follows:
A. The arrangement described and the contributions determined in accordance with 9 above, and made in accordance with 10(b) above, will constitute an RCA as defined in subsection 248(1) of the Act.
B. No amount will be included in a Member's income pursuant to sections 5 and 6 of the Act solely by virtue of the fact that contributions are made, in respect of the Member in accordance with 10(b) above, and as described in 12 and 13 above.
C. Any amounts paid out of the RCA to a Member or an Original Member, including Refundable Tax, will be required to be included in the income of the Member or Original Member, pursuant to paragraph 56(1)(x) of the Act, in the year received.
D. Amounts paid to a Member's Beneficiary in accordance with 25 above will be required to be included in the income of the Member's Beneficiary, except to the extent that the amount is included in the income of the Member or the Estate under paragraph 56(1)(x) or subsection 70(2) of the Act, pursuant to paragraph 56(1)(z) of the Act, in the year received.
The above 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 dated May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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