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: Is the supplemental pension plan an SDA or RCA?
Position: No.
Reasons: The plan is unfunded and is supplemental to the pension to be provided under the employer's RPP. Also, the pension to be paid from the supplemental plan carves out the pension that will be provided from the RPP where the contributions made under the employer's RPP are at the money purchase limit as defined in subsection 147.1(1) of the Act. While funds may be set aside and invested to pay the benefits from the supplemental plan, the funds will remain available to the general creditors of the employer and can be used by the employer for other purposes.
XXXXXXXXXX 2006-020327
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Corporation")
Business Number: XXXXXXXXXX
This letter is in reply to your letter dated XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the above-referenced Corporation and is further to your e-mails sent to us on 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 Corporation 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 Corporation or a related person;
(iii) under objection by the Corporation 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.
This letter is based solely on the facts and proposed plan described below. The documentation submitted with your request and in your electronic correspondence does not form part of the facts and proposed plan and any references thereto are provided solely for the convenience of the reader.
Definitions
a) "Actuarial Equivalent" means a benefit of equivalent value computed using actuarial tables and such other methods and assumptions as may be adopted by the Corporation on the recommendation of the Actuary for purposes of this SERP.
b) "Actuary" means a Fellow of the Canadian Institute of Actuaries, or a firm employing a Fellow of the Canadian Institute of Actuaries, designated by the Corporation for purposes of this SERP.
c) "Beneficiary" means the person or persons designated by a Participant to receive benefits under this SERP in the event of the death of the Participant after retirement.
d) "Commuted Value" means a lump sum amount which is the actuarial present value of a pension benefit computed using the pre-tax rates of interest and the actuarial tables adopted by the Corporation on the recommendation of the Actuary. Such Commuted Value shall be determined using assumptions and methods consistent with those used under a registered pension plan and shall not take into account that this SERP is not subject to the same tax treatment as is a registered pension plan.
e) "Early Retirement Date" means, after the XXXXXXXXXX attains age XXXXXXXXXX , the first day of any month prior to the Normal Retirement Date in which a XXXXXXXXXX who has terminated Pensionable Service elects to retire.
f) "Earnings" means the base salary that the XXXXXXXXXX receives from the Corporation in a calendar year plus any override commission paid to the XXXXXXXXXX in the year, as determined by the Corporation. Earnings during a period of disability shall be deemed to be at the level of Earnings in effect immediately prior to becoming disabled.
g) "Final Average Earnings" means the annualized average of the XXXXXXXXXX Earnings over the best XXXXXXXXXX consecutive calendar months during the XXXXXXXXXX last XXXXXXXXXX years of Pensionable Service.
h) "Maximum Account" means a notional account as defined in 13.
i) "Maximum Benefit" means a notional benefit as defined in 10.
j) "Notional Contributions" mean notional contributions determined by the Actuary, that would be required if the SERP Account were funded.
k) "Notional Credited Service" means the number of years and completed months, with months represented by a fractional part of a year, not exceeding XXXXXXXXXX years, of Pensionable Service.
l) "Normal Form" means the form of an annuity payable in equal monthly installments for the life of the XXXXXXXXXX , with a guarantee of at least XXXXXXXXXX monthly payments.
m) "Normal Retirement Date" means the first day of the month following or coincident with the date in which the XXXXXXXXXX attains age XXXXXXXXXX .
n) "Offset Account" means a notional account as defined in 14.
o) "Offset Benefit" means a notional benefit as defined in 11.
p) "Pensionable Service" means the period of the XXXXXXXXXX uninterrupted service with the Corporation during which the XXXXXXXXXX was participating in the Corporation's registered pension plan as shown on the Corporation's records calculated from the date the XXXXXXXXXX joined the registered pension plan and ending on the date the XXXXXXXXXX retires, dies, or otherwise terminates employment, whichever comes first.
q) "Postponed Retirement Date" means the first day of the month in which the XXXXXXXXXX terminates Pensionable Service after the Normal Retirement Date, or XXXXXXXXXX of the calendar year in which the Participant attains age XXXXXXXXXX , whichever occurs first.
r) "Retirement Date" means the earliest of the Early Retirement Date, the Normal Retirement Date or the Postponed Retirement Date applicable to the XXXXXXXXXX and, notwithstanding the date otherwise applicable, unless otherwise approved by the Corporation, shall be the same as the date that the XXXXXXXXXX elects for retirement under the Corporation's registered pension plan.
s) "SERP Account" means a notional account as defined in 15.
t) "SERP Benefit" means a notional benefit as defined in 12.
u) "Unreduced Retirement Date" means the first day of the month following or coincident with the date the XXXXXXXXXX attains age XXXXXXXXXX .
v) XXXXXXXXXX
Facts
1. The Corporation was incorporated under the XXXXXXXXXX . The Corporation is a taxable Canadian corporation that files its tax returns at the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office. The taxation year-end of the Corporation is XXXXXXXXXX .
2. The Corporation's assets in Canada include a wholly owned subsidiary, XXXXXXXXXX ("Subco"), which is a holding company. XXXXXXXXXX
3. XXXXXXXXXX
4. The Corporation maintains a registered pension plan (the "RPP") for its salaried employees under Canada Revenue Agency (CRA) registration number XXXXXXXXXX entitled "XXXXXXXXXX ." The RPP is structured as a defined contribution pension plan for all employees within the Corporation group of companies and provides, inter alia, each participating XXXXXXXXXX with the maximum pension contribution and benefits permitted for a defined contribution pension plan under the Act.
Proposed Plan
5. The Corporation will establish, effective XXXXXXXXXX , the Corporation Supplementary Executive Retirement Plan (the "SERP") in respect of its XXXXXXXXXX who elect to participate in the SERP (the "Participants").
6. The SERP effective date is conditional on the receipt of both a favourable advance income tax ruling from the CRA and the final approval of the board of directors of the Corporation. No payments to SERP Participants will be made under this SERP until after this effective date.
7. The SERP will provide a supplementary pension based on the Participant's Earnings and Pensionable Service with the Corporation.
8. Any and all agreements between the Corporation and the Participant with respect to the payment of other benefits upon termination of employment shall be null and void. Such other benefits shall include, but not be limited to, retiring allowances, severance payments and salary continuation irrespective of the reason or basis for termination of employment.
9. The benefits under the SERP will be determined in accordance with the provisions of 10 to 17 below.
10. The Maximum Benefit, subject to the provisions of 16, if applicable, shall be an annual pension equal to:
XXXXXXXXXX % x Final Average Earnings x Notional Credited Service.
11. The Offset Benefit shall equal the annual pension payable in the Normal Form commencing on the Participant's Normal Retirement Date or Early Retirement Date, whichever is applicable, which can be provided by the Offset Account. The Corporation shall determine such pension by obtaining a minimum of XXXXXXXXXX annuity quotes from Canadian life insurance companies maintaining a financial strength rating of at least A- by the A.M. Best rating agency. The annuity quote providing for the largest annual pension benefit shall then be utilized in determining the Offset Benefit. The Offset Benefit shall also include the annual pension benefit that is attributable to a Participant's period of employment with a participating subsidiary or affiliate prior to joining the RPP but only where such employment is Pensionable Service.
12. The SERP Benefit shall be the annual pension equal to any positive amount by which the Maximum Benefit exceeds the Offset Benefit.
13. The Maximum Account shall equal the Commuted Value of the Maximum Benefit computed assuming benefit commencement on the Participant's Normal Retirement Date subject to the provisions of 16 or 17, if applicable.
14. The Offset Account shall equal the Participant's account balance under the RPP at the time the Participant retires or otherwise ceases Pensionable Service, plus the value at the time of any payment made or assignment to a former spouse in respect of the RPP, plus any other severance benefit the Participant receives upon leaving the Corporation involuntarily. The Offset Account shall also include the value at the time of any lump sum transfers into the RPP from a participating subsidiary or affiliate employer's registered pension plan but only where the service with such other employer is Pensionable Service. For greater certainty, the contributions made to a Participant's account under the RPP and used for purposes of calculating the Offset Benefit are the maximum contributions allowed to a money purchase provision under the Act and are considered to be at the money purchase limit as defined in subsection 147.1(1) of the Act.
15. The Corporation shall credit Notional Contributions to a SERP Account that shall have a value equal to any positive amount by which the Maximum Account exceeds the Offset Account.
16. If the Participant's Retirement Date is the Early Retirement Date, the Maximum Account and Maximum Benefit shall be computed as if the Participant were entitled on the Early Retirement Date to an annual pension in accordance with 10 above but reduced by XXXXXXXXXX % for each month by which the Early Retirement Date precedes the Unreduced Retirement Date.
17. If the Participant's Retirement Date is the Postponed Retirement Date, the Maximum Account and Maximum Benefit shall be computed as if the Participant were entitled on the Postponed Retirement Date to an annual pension in accordance with 10 above, without any actuarial increase.
18. Notional Contributions will be credited to a notional account. For greater certainty, the Maximum Account and Offset Account are also notional accounts.
19. The Notional Contributions that will be credited by the Corporation to a Participant's SERP Account shall be determined by the actuary as the contribution that would be required if the SERP were funded.
20. The Corporation shall not be under any obligation to provide any benefits under the SERP in respect of a Participant until the occurrence of one of the following events:
a) Death of a Participant, as described in 25.
b) Termination of the Participant prior to retirement, as described in 22, 23 and 24. The term "termination" means the permanent loss of an office or employment of the Participant with an employer participating in the SERP, with the result that the Participant permanently ceases to accrue further service under the SERP. The Participant's termination may also occur at the time the Participant becomes disabled and qualifies for disability benefits under the group long-term disability insurance plan sponsored by the Corporation for its employees.
c) Retirement of the Participant from an employer participating in the SERP, as described in 21.
21. In the event of a Participants' retirement, the calculated benefit shall be paid by the Corporation and received by the Participant upon the retirement date in the Normal Form. The benefit may also be received in an optional form permitted by the Corporation and determined to be actuarially equivalent.
22. In the event of a Participant's voluntary termination of employment, the Participant may choose to receive a deferred pension beginning at age XXXXXXXXXX or a lump sum payment equal to the Commuted Value of the Participant's benefit.
23. In the event of the involuntary termination of the employment of a Participant who is under the age of XXXXXXXXXX , the SERP Benefit will be offset by both the defined contribution plan and any severance benefit the Participant may receive. If the Participant is XXXXXXXXXX years of age or older, the Participant may choose to receive a deferred pension beginning at age XXXXXXXXXX or a lump sum payment equal to the balance of the SERP Account.
24. In the event that the Participant becomes permanently disabled, the Participant is eligible to receive benefits under the Corporation's long-term disability plan and may continue to be eligible for benefits under the SERP and earn Pensionable Service. For purposes of calculating the SERP Benefit, the Participants' Earnings will be based on the level of Earnings of the Participant immediately before becoming disabled.
25. In the event the Participant dies before retirement and is not vested under the RPP, there will be no payment due under the SERP. If the Participant dies while being vested in the RPP and the Participant has a legally recognized spouse, the Participant's spouse will be entitled to a lump sum payment equal to the Commuted Value of the SERP Benefit. If there is no legally recognized spouse, and benefit payments have not commenced, there will be no entitlement to a benefit. For purposes of the SERP, the term spouse includes the Participants legally married, common-law, or same-sex spouse as determined by the appropriate provincial legislation in the province for which the Participant lives. If the Participant dies after retirement and before the minimum number of payments has been made under the Normal Form, the Participant's Beneficiary will receive the payments that the Participant would be otherwise entitled to. The Corporation in this case may, at its discretion, elect to pay the lump sum Commuted Value. If the Participant has elected an optional form of payment, the remaining benefit shall be paid to the Beneficiary in accordance with this optional form of payout.
26. The Corporation will invest funds that equal the amounts credited to the Participant's SERP Accounts. Such investments will be made from the general corporate funds of the Corporation. These funds and any earnings:
a) will legally belong to the Corporation;
b) will not be held in trust by the Corporation or a party related to the Corporation for or on behalf of the Participants;
c) will be subject to the claims of general creditors; and
d) may be used by the Corporation for other business purposes.
27. The Participants will not have any right to, or claim against these funds.
28. The Corporation will pay all costs of establishing the SERP, including legal and accounting fees, and all ongoing administration costs of the SERP.
29. The Corporation will have the right to amend or terminate the SERP. No such amendment shall affect the amounts credited to a Participant's SERP Account prior to the date of such amendment and no amount will be paid out prior. The Corporation has no intention of terminating the SERP, however termination may occur as a result of events beyond the control of the Participants.
Purpose of the Proposed Plan
30. The Corporation proposes to establish the SERP for eligible highly paid employees in Canada in order to fulfill certain objectives:
a) To provide an opportunity for highly paid employees to earn adequate levels of retirement income; and
b) Encourage valued employees to remain with the Corporation by providing competitive benefit programs.
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 SERP will not constitute a salary deferral arrangement, as that term is defined in subsection 248(1) of the Act.
B. The SERP will not constitute a retirement compensation arrangement, as that term is defined in subsection 248(1) of the Act.
C. No amount will be included in the income of a Participant under subsection 5(1) of the Act, paragraph 6(1)(a) or subparagraph 56(1)(a)(i) of the Act as a result of, in and by itself, the Participant's participation in the Plan.
D. Each payment made under the SERP by the Corporation to a Participant or Beneficiary will be required to 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) of the Act.
E. Subsection 12(4) of the Act will not apply to a Participant to require any amount to be included in computing the Participant's income for a year as interest in respect of any entitlements the Participant may have under the SERP.
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
Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of any other tax consequences relating to the facts, proposed plan or any transaction or event taking place either prior to the implementation of the proposed plan or subsequent to the implementation of the proposed plan, whether described in this letter or not, other than those specifically described in the rulings given above.
Yours truly,
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2007
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2007