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.
Whether the supplemental pension plan is an SDA or an RCA?
The plan is an unfunded arrangement to provide pension benefits that are supplementary to the benefits provided under the employer's RPP. While funds may be set aside and invested to pay for benefits under the plan, the funds will remain available to the general creditors of the employer.
Re: Advance Income Tax Ruling Request
This is reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge receipt of your fax dated XXXXXXXXXX.
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayer or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
(iii) under objection by the taxpayer or a related person,
(iv) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired, and
(v) the subject of a ruling previously issued to the taxpayer or a related person by this Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (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.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Definitions and Abbreviations
"CRA" means the Canada Revenue Agency;
"DBPP" means the XXXXXXXXXX, a registered defined benefit pension plan (CRA registration number XXXXXXXXXX);
"DBPP Service" means pensionable service accrued as a member of the DBPP;
"Employer" means XXXXXXXXXX;
"Manager" means the XXXXXXXXXX Manager;
"Plan" means the XXXXXXXXXX;
1. The Employer is exempt from federal income taxes.
2. The Employer files its income tax returns with the XXXXXXXXXX Taxation Centre.
3. The Employer is introducing the Plan for eligible management employees who are currently members and participants in the DBPP. The Employer is a participating employer in the DBPP. The DBPP is subject to the maximum pension limits under the Act.
4. On XXXXXXXXXX, the Manager approved the summary of the Plan terms. The Employer's Human Resources Department has been given the authority to take the necessary steps to fully implement the Plan. The Plan is intended to supplement the DBPP so that the combined benefits are equivalent to the benefit the DBPP could provide if not for the maximum pension limits imposed under the Act.
5. The Employer's role with respect to the Plan includes the preparation of Plan documentation, communication of the terms of the Plan to Plan members, and administration of the Plan's provisions.
6. Subject to the receipt of a favorable advance income tax ruling, the Employer's Human Resources Department will implement the Plan for designated management employees of the Employer.
7. The summary of the relevant terms of the Plan will be as follows:
a) Employees eligible to participate in the Plan will be restricted to employees of the Employer that participate in the DBPP that are in a position designated by the Manager. The following employees and other individuals will not be eligible to participate in the Plan:
? employees who are on contract,
? individuals on XXXXXXXXXX,
? individuals who are in receipt of a pension from a pension plan sponsored by the Employer, or,
? individuals who are employed by the XXXXXXXXXX
b) Subject to the exception noted herein, Plan service will be equal to DBPP Service accrued while the employee was employed by the Employer as a member of the Plan. Periods of leave are not recognized as Plan service, even if a period of leave is recognized as pensionable service under the DBPP.
c) A member who works less than full-time in a calendar year would receive less than one year of the Plan service for the calendar year.
d) The service recognized under the Plan ceases to accrue when the member ceases to be a member of the DBPP or reaches XXXXXXXXXX years of DBPP Service. However, salary after XXXXXXXXXX years will continue to be recognized for the purposes of calculations of the Plan benefit.
e) Periods of disability are recognized as Plan service.
f) Members are not permitted to contribute to the Plan.
g) The Employer shall not pre-fund the benefits earned under the Plan.
h) The annual Plan benefit is equal to XXXXXXXXXX% of the excess, if any, of the average of the member's highest XXXXXXXXXX consecutive year salary over the average of the highest XXXXXXXXXX consecutive year DBPP capped salary, multiplied by the number of years of Plan service on and after XXXXXXXXXX.
i) The member's salary is equal to the member's salary that would be pensionable under the DBPP without regard to the DBPP salary cap, (i.e. not limited due to the maximum pension rule under the Act).
j) The member's salary for the purpose of calculating the Plan benefit includes only salary recognized under the DBPP while a member of the Plan. For example, a member's salary earned prior to XXXXXXXXXX would not be salary under the Plan and therefore would not be used to determine the Plan benefit.
k) The member's DBPP capped salary is equal to the maximum pensionable salary as determined under the DBPP. The DBPP capped salary for a given year will result in a DBPP pension credit for the year that is equal to the maximum lifetime pension provided under the Act for the same year.
l) The years used to determine the member's average DBPP capped salary are the same as the years used to determine the member's average salary.
m) If the member has less than XXXXXXXXXX years (XXXXXXXXXX months) of Plan service at the date the Plan benefit is determined, the average salary shall be determined by adding up the member's salary throughout the Member's entire period of Plan service and dividing that result by the total Plan service.
n) Benefit of members of the Plan is vested if the member has XXXXXXXXXX or more years of Plan service. For vesting purposes, years of the Plan service is not based on DBPP Service. If a member with vested benefit retires or terminates prior to age XXXXXXXXXX, the annual Plan benefit is reduced by XXXXXXXXXX% per month that the member's retirement date precedes the earlier of the date that the member attains age XXXXXXXXXX or the date the member's age plus DBPP Service is equal to XXXXXXXXXX (counting only attained DBPP Service to the date of retirement or termination).
o) If at termination of employment, the member's benefits are not vested under the Plan, no benefit will be payable from the Plan.
p) If the employment of a member with vested benefits is terminated prior to age XXXXXXXXXX, the member is entitled to receive a lump sum cash payment equal to the commuted value of the annual Plan benefit accrued to the member's date of termination, less any required withholding for income taxes. In such a case, the commuted value is determined on the basis that the annual Plan benefit commences at age XXXXXXXXXX and is payable over the member's lifetime with the guarantee that should the member die before receiving XXXXXXXXXX annual payments, such payments shall continue to the member's beneficiary until a total of XXXXXXXXXX annual payments have been made. For the purpose of determining the commuted value, the annual Plan benefit is assumed to be indexed at the same rate at which the DBPP pension is indexed (XXXXXXXXXX) for the period prior to commencement of the benefit and upon commencement of the benefit.
q) A member with vested benefits who retires or terminates employment on or after age XXXXXXXXXX is entitled to receive a lump sum cash payment equal to the commuted value of the annual Plan benefit, less any required withholding for income taxes. In that case, in lieu of a lump sum cash payment, a member may elect to receive the lump sum cash payment in XXXXXXXXXX equal annual instalments. The first annual instalment is due on the first day of the month following the member's retirement or termination date. With approval from the Manager, the member may defer the commencement date to the first day of the tax year following the member's retirement or termination date. The election to receive the lump sum cash in XXXXXXXXXX equal instalments as well as the choice to defer the commencement date will be made before the date of the member's retirement or termination and will be irrevocable.
r) The commuted value for a member who retires or terminates employment on or after age XXXXXXXXXX is determined on the basis that the annual Plan benefit commences immediately and is payable over the member's lifetime with the guarantee that should the member die before receiving XXXXXXXXXX annual payments, such payments shall continue to the member's beneficiary until a total of XXXXXXXXXX annual payments have been made. For the purpose of determining the commuted value, the Plan benefit is assumed to be indexed at the same rate at which the DBPP pension is indexed (XXXXXXXXXX) for the period after commencement of the benefit.
s) The lump sum cash payment described in (p) and (q) above would be paid within XXXXXXXXXX days of the member's date of retirement or termination. With approval from the Manager, the member may defer the payment date of the lump sum cash payment to the first day of the tax year following the member's retirement or termination date. The choice to defer the commencement date will be made before the date of the member's retirement or termination and will be irrevocable.
t) The Plan benefit payable upon the member's death before or after retirement is payable to the person entitled to receive survivor benefits under the DBPP.
u) The pre-retirement death benefit payable is the commuted value of the member's Plan benefit accrued to the member's date of death, as if the member terminated employment on the date of the member's death.
v) The post-retirement death benefit payable is the commuted value of the member's remaining Plan entitlement, if any.
w) Any expenses arising in respect of the administration of the Plan including but not limited to the fees and other expenses and charges of the actuary are payable from earmarked assets or from other corporate assets of the Employer.
x) If a former member, having accepted a lump sum cash payment or annual instalments from the Plan with respect to the member's previous period of employment, is re-employed as an employee, the member shall be treated as a new employee and shall be eligible to participate in the Plan if the member meets the eligibility requirements for the Plan.
y) The fiscal year of the Plan shall end on the XXXXXXXXXX in each year.
z) The Employer shall appoint an actuary, who will act as technical advisor in all matters in connection with the Plan requiring actuarial computations and valuations. The actuary shall undertake to complete an actuarial valuation of the Plan at least once every XXXXXXXXXX years.
aa) The Manager may amend or terminate the Plan at any time.
8. While the Plan is unfunded, the Employer may set aside and invest sums of money equal to the Plan liabilities. These assets will continue to belong to the Employer and will not be held for the benefit of the Plan members. Thus, the members of the Plan will have no direct claims against these assets, and such assets will remain available to the general creditors of the Employer. The Plan benefits will be paid from the Employer's general assets as they fall due. The amount of assets set aside for matching the Plan liabilities will be increased or decreased depending on the Employer's liabilities as determined by the actuarial valuations and at the Employer's discretion.
9. It is the Employer's intention that some or all of the assets set aside for matching the Plan liabilities will be invested in pooled funds managed by one or more financial institutions as part of an investment program for which the Employer would be responsible for governance.
Purpose of the Proposed Transactions
10. The purpose of the proposed transactions is to provide members of the Plan, who also participate in the DBPP, with retirement benefits that are not limited by the maximum pension limits under the Act.
11. The proposed transactions will have no impact on any outstanding tax liabilities of the Employer.
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we rule as follows:
A. The Plan will not constitute a salary deferral arrangement as that term is defined in subsection 248(1).
B. The Plan will not constitute a retirement compensation arrangement as that term is defined in subsection 248(1).
C. Payments made by the Employer to a member of the Plan or his/her beneficiary, will be included in the income of the recipient in the year it is received as a superannuation or pension benefit pursuant to subparagraph 56(1)(a)(i).
D. No amount will be included in the income of a member under subsection 5(1) or paragraph 6(1)(a) as a result of, in and by itself, the member's participation in the Plan.
The above advance income tax 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 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the CRA provided the proposed Plan is implemented before XXXXXXXXXX.
Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of any other tax consequences relating to the facts, proposed transactions or any transaction or event taking place either prior to the implementation of the proposed transactions or subsequent to the implementation of the proposed transaction, whether described in this letter or not, other than those specifically described in the rulings given above.
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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