2005 Ruling 2005-0118591R3 - RRSP Damages

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: Employee and her husband suffered investment losses in registered and non-registered accounts managed by employer, including a group retirement savings plan (GRSP) offered by the employer to its employees as a benefit of employment. In consideration for employee and husband agreeing to release the employer from their claims with respect to those losses, employer agrees to re-contribute an amount equal to the employer's previous contributions to the employee's GRSP, to a RRSP of which the employee is both contributor and annuitant.

Position: The payment to the employee's RRSP will not constitute a premium or a gift to the RRSP and will not result in income to the employee.

Reasons: The payment is a replenishment of funds in a registered account.

XXXXXXXXXX 						2005-011859

XXXXXXXXXX 2005

XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request an Advance Income Tax Ruling on behalf of the above-named taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the Ruling request:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is 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) is under objection by the taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) is 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.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

"Employee" means XXXXXXXXXX;

"GRSP" means the Group Retirement Savings Plan offered by X Co. to its participating employees as a benefit of employment referred to in paragraph 4 below;

"RRSP" means a "registered retirement savings plan" within the meaning defined in subsection 146(1) of the Act; and

"X Co. " means XXXXXXXXXX.

Facts

1. The Employee is a resident of the city of XXXXXXXXXX. Her Tax Services Office is the XXXXXXXXXX Tax Services Office and she files her tax returns at the XXXXXXXXXX Tax Centre.

2. The Employee was employed by X Co. in XXXXXXXXXX for approximately XXXXXXXXXX years. Her last day of employment with X Co. was XXXXXXXXXX.

3. At the time that the Employee ceased to be employed with X Co., she was the contributor to several investment accounts that were managed by X Co. including:

Plan Number				Plan Type
XXXXXXXXXX 			XXXXXXXXXX 

4. X Co. offered to the Employee, as a benefit of her employment, the right to participate in X Co.'s GRSP. Under the GRSP, X Co. agreed to match certain of the Employee's contributions to her registered retirement savings plans. Pursuant to the GRSP, the Employee received matching contributions from X Co. for the Employee's contributions to investment accounts XXXXXXXXXX.

5. In or about the month of XXXXXXXXXX, the value of the Employee's accounts with X Co. began to decline significantly. This decline in value continued for several years. For example, the relative values of the Employee's RRSPs managed by X Co. in XXXXXXXXXX and in XXXXXXXXXX were as follows:

Fair Market Value
Plan Number			XXXXXXXXXX 	XXXXXXXXXX
XXXXXXXXXX 		XXXXXXXXXX 	XXXXXXXXXX 

6. On XXXXXXXXXX, the Employee commenced a dialogue in writing with X Co. to investigate the reasons for the significant losses in the values of her investment accounts. The Employee concluded that X Co. had invested her funds into a high-risk portfolio contrary to her instructions.

7. On XXXXXXXXXX, X Co. terminated the Employee's employment, without prior notice, advising only that for "business reasons" a decision had been made to make some "organizational changes".

8. Shortly after XXXXXXXXXX, the Employee retained a solicitor to assist her in negotiating a settlement with X Co. with respect to the termination of her employment and the losses she had sustained in her investment accounts.

9. On XXXXXXXXXX, X Co. presented the Employee with an offer in writing ("the Settlement Letter") pertaining to the termination of her employment and to the losses she had sustained in her investment accounts. The Settlement Letter offered the Employee salary continuation and certain employee benefits equivalent to XXXXXXXXXX years notice ("the Notice Amount"). The Employee had agreed to the quantum of the Notice Amount prior to receiving the Settlement Letter. As such, the Employee will be accepting the Notice Amount.

10. The Settlement Letter also included an offer to re-contribute the amount of $XXXXXXXXXX to a RRSP of the Employee ("the Offer"). The amount of the Offer represents the total contributions that X Co. had previously made to the Employee's GRSP.

11. At the time of the Settlement Letter, the Employee and X Co. had not agreed upon appropriate compensation for the Employee's investment losses. The offer was repeated in a letter from X Co. to the Employee dated XXXXXXXXXX.

12. The Offer, but not the Notice Amount, is conditional upon both the Employee and her husband releasing their claims against X Co. for losses to their investment accounts.

Proposed Transactions

13. The Employee proposes to accept the Offer.

14. Upon the Employee's acceptance of the Offer, X Co. will pay, pursuant to the Employee's direction, the amount of $XXXXXXXXXX to the trustee of a RRSP of which the Employee is both the contributor and the annuitant ("the Payment").

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to settle the Employee's dispute with X Co. pertaining to investment losses in her investment accounts. The Employee will release her claims against X Co. in return for the replenishment, in part, of the value to her RRSPs.

Rulings

Provided that the preceding statement of facts and proposed transactions are correct and constitute a complete and accurate disclosure of all the relevant facts and proposed transactions, and the proposed transactions are carried out as described above, our rulings are as follows:

A. Provided the employee does not claim a deduction pursuant to subsection 146(5) of the Act in respect of the Payment, no amount will be included in the income of the Employee under sections 3, 5, 6, or 146 in respect of the Payment; and

B. The Payment will not be considered a premium or a gift as either of those terms are used in factor I of the formula in subsection 204.2(1.2) of the Act.

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed the nature of the Notice Amount for any purpose of the Act.

The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch