25 April 2005 External T.I. 2005-0119931E5 - 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 benefits be provided from an RCA that is to be set up by a newly-incorporated business in respect of a period during which an individual was a partner or proprietor of the business that is subsequently incorporated?

Position: No.

Reasons: A partner or proprietor is not providing employment services.

XXXXXXXXXX 							2005-011993
P. Kohnen, CMA
April 25, 2005

Dear XXXXXXXXXX:

Re: Technical Interpretation - RCA for Recently Incorporated Professional

This is in response to your submission of March 1, 2005 and further to a telephone conversation (XXXXXXXXXX/Kohnen) of February 24, 2005 in which you requested our clarification with respect to the comments provided in our document 2004-008299 (the "Interpretation").

The Interpretation provided our views as to whether it would be acceptable to include the period of time during which an individual operated his practice as a sole proprietor before incorporation, when determining the amount of benefits which could be provided to the individual from a retirement compensation arrangement ("RCA") to be funded by the new corporation.

As was noted in the Interpretation, paragraph 20(1)(r) of the Income Tax Act (the "Act"), which governs the deductibility of employer contributions to an RCA, provides that contributions to an RCA must be made in respect of services rendered by an employee or former employee of the taxpayer. These services must be employment services rendered by the member.

Paragraph 8(b) of Information Circular 72-13R8 - Employees' Pension Plans, states that a partner or proprietor is not an employee. As is noted in your submission, the term "employment" is defined in subsection 248(1) of the Act as "the position of an individual in the service of some other person". Given that a partner or proprietor does not, by the nature of their relationship, provide such employment services to the partnership or proprietorship (as applicable), any such periods during which an individual was a partner in or proprietor of a business would not be employment services for the purpose of determining the benefits that may be provided to the individual from an RCA. Hence, when determining the amount of funding by a new corporation of benefits that may be provided to an individual from an RCA, in our view, it would not be acceptable to include the period of time during which the individual operated his practice as a sole proprietor before incorporation.

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
Policy and Planning Branch