1 May 2006 External T.I. 2005-0149261E5 - SDA versus RCA

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: Whether a proposed employee incentive plan would be considered an RCA or an SDA?

Position: Question of fact

Reasons: The purpose for which a plan was established must be determined.

XXXXXXXXXX 							2005-014926
J. Gibbons, CGA
May 1, 2006

Dear XXXXXXXXXX:

Re: Retirement Compensation Arrangements ("RCAs")

We are responding to your letter dated August 19, 2005, concerning the definition of an RCA in subsection 248(1) of the Income Tax Act (the "Act"). In particular, you wish to know whether a proposed plan would satisfy the requirements of the definition of a "retirement compensation arrangement" ("RCA") or whether it would result in a "salary deferral arrangement" ("SDA").

In this regard, the employer would enter into new employment contracts with certain key employees whereby the employees would be provided with a funded supplementary executive retirement plan (a "SERP") and in return their commissions rate would be reduced. Thus, for the same sales volume, these employees would receive lower compensation than before.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and the subject matter of a request for an advanced income tax ruling submitted in the manner set out in Information Circular 70-6R5. However, we have provided some general comments below, which we hope will be of some assistance to you.

An RCA is defined in the Act as a plan or arrangement under which contributions (other than payments made to acquire an interest in a life insurance policy) are made by an employer or former employer of a taxpayer, or by a person with whom the employer or former employer does not deal at arm's length, to another person or partnership 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 (hereinafter simply referred to as "the termination of employment"). However, the definition of an RCA specifically excludes certain plans, including an SDA, from being considered an RCA.

An SDA is a plan or arrangement, whether funded or not, under which any person has a right in a taxation year to receive an amount after the year where it is reasonable to consider that one of the main purposes for the creation or existence of the right is to postpone tax payable under this Act by the taxpayer in respect of an amount that is, or is on account or in lieu of, salary or wages of the taxpayer for services rendered by the taxpayer in the year or a preceding taxation year (including such a right that is subject to one or more conditions unless there is a substantial risk that any one of those conditions will not be satisfied). However, paragraphs (a) through (l) of the definition of an SDA specifically excludes certain plans or arrangements from being considered SDAs.

As you indicated in your letter, our Directorate has previously opined that it is a question of fact whether the conversion of an established bonus plan into a funded SERP would result in an RCA or an SDA but in our view it would be very difficult to support that such an arrangement is not designed or intended to postpone the taxes that would otherwise be payable in respect of the employee's salary or wages. While our views on this issue have not changed, it should be noted that we recognize that there may be exceptional situations in which this conclusion may not be warranted. Since you appear to have a proposed transaction in mind, we would be pleased to consider the issue in a request for an advance income tax ruling.

We trust that these comments will be of assistance.

Yours truly,

for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch