21 June 2007 Roundtable, 2007-0229361C6 - 2007 - CLHIA question 13 - SERPS

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: What factors it considers in determining whether a SERP is an SDA or a pension plan?

Position: A number of factors need to be considered in determining whether a particular plan is a SERP or an SDA. Some of these are outlined in the response.

Reasons: The definition of an SDA excludes registered pension plans. It does not preclude plans that have terms similar to those found in a pension plan or plans that provides benefits that are similar to those provided under a pension plan.

CLHIA ROUNDTABLE - MAY 2007

Question 13

SERPs

A "superannuation or pension benefit" is not defined in the tax rules other than by way of an inclusive definition: a "superannuation or pension benefit" includes any amount received out of or under a superannuation or pension fund or plan. . . " Many employees are eligible for supplementary pension or retirement benefits under an unfunded supplementary employee retirement plan (or SERP) that provides for defined benefits in excess of those that can be provided under a "registered pension plan".

If the SERP benefits are "superannuation or pension benefits", they are expressly excluded from being "salary or wages" for tax purposes and the SERP is thereby precluded from being a "salary deferral arrangement" (because it is not a plan to pay "salary or wages"). In deciding whether a SERP is a "salary deferral arrangement", it is therefore necessary to interpret the phrase "superannuation or pension benefit".

Generally, words or phrases that are undefined in the ITA are to be interpreted by reference to their ordinary meaning. However, it appears that the CRA's position is that, if the SERP benefits exceed the defined benefits that could have been paid under a defined benefit "registered pension plan" but for the "defined benefit limit", the SERP will be considered to be a "salary deferral arrangement".

For example, we understand that, where a SERP pays a defined benefit equal to 150% of the defined benefit under the registered pension plan (i.e. because the SERP tops up the registered pension plan benefit from a 2% annual accrual rate to a 3% annual accrual rate), the CRA considers the SERP to be a "salary deferral arrangement" even if its terms are otherwise the same as those of the registered pension plan.

Questions:

1. Can the CRA explain its reasoning in reaching this position? Can the CRA explain what other factors it considers in determining whether SERP benefits are "superannuation or pension benefits"?

2. Does the Department of Finance agree, as a matter of tax policy, with the CRA's position that unfunded SERPs that provide for "superannuation or pension benefits" (within the ordinary meaning of that phrase) should be considered to be "salary deferral arrangements" if the SERP benefits exceed the defined benefits that could have been paid under a defined benefit "registered pension plan" if the "defined benefit limit" did not apply?

Agency's Response

The definition of an SDA excludes registered pension plans. It does not preclude plans that have terms similar to those found in a pension plan or plans that provides benefits that are similar to those provided under a pension plan.

When the CRA is asked to express its views on whether a particular plan or arrangement is a salary deferral arrangement ("SDA") it must review all the terms of the plan and the factors related to its use in a particular situation in order to determine whether the plan is an SDA.

The CRA is of the view that an unregistered pension plan is not excluded from the definition of an SDA. However, the CRA has taken the position that a plan will not be treated as an SDA where the plan has the characteristics of an unregistered or supplementary pension plan and the amounts that may be paid out of or under the plan can be considered to be reasonable superannuation or pension benefits. Where a plan provides benefits that are not reasonable superannuation or pension benefits, the CRA is of the view that a salary deferral arrangement will exist.

The CRA generally takes the position that supplementary pension benefits will be considered reasonable if the terms of an arrangement are substantially the same as those of the registered pension plan that applies to the same beneficiaries to whom the arrangement applies and the benefits that can be paid under the arrangement are the same as the benefits that would have been paid under the registered pension plan but for the defined benefit or money purchase limit. Where a specific arrangement provides benefits that are not the same as those provided under the registered plan, or are greater than those that could be provided under the registered plan (but for the defined benefit or money purchase limit), then the terms of the arrangement and any other relevant information must be considered to determine if the benefits are reasonable in order to ensure that the plan or arrangement will not be considered an SDA. While not exclusive, some of the factors that would need to be considered are:

• The reasonableness of the benefits provided under the plan in comparison to the provisions of the registered plan that applies to the particular employees;
• The history of the employer in providing pension benefits;
• The comparability of the benefits provided to other employees of the employer or related employers under other arrangements; and
• The history of the employees' remuneration and any variations in that income as a consequence of the establishment of the arrangement.

Finance's Response

We agree with the CRA that an unfunded SERP that provides unreasonable benefits should be considered to be an SDA, and that the determination of "reasonableness" in this context can require the consideration of any number of factors the relevance of which will depend on the particular circumstances.

What we do not agree with is the statement in the background to this question to the effect that a SERP is precluded from being an SDA. The express exclusion of registered pension plans (RPPs) in the SDA definition in subsection 248(1) of the Income Tax Act demonstrates clearly the tax policy view that a pension plan could have, as one of its main objectives, the deferral of tax on an amount that would otherwise have been received as salary or wages and that, where this is the case, the plan (if not an RPP) should be treated as an SDA.