6 November 2007 External T.I. 2007-0239881E5 - Funding of a retirement compensation Arrangement

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: Clarification of comments on funding of RCAs found in E9123315 and clarification of the tax consequences when a retiring allowance is paid over an extended period.

Position: General comments provided.

							2007-023988
XXXXXXXXXX 						W. C. Harding
							613-957-8953
November 6, 2007

Dear XXXXXXXXXX:

Re: Funding of Retirement Compensation Arrangements (RCAs) and Payment of Retiring Allowances

This is in reply to your letter of June 7, 2007, in which you asked for clarification of comments made in our file E9123315 concerning the funding of RCAs and the tax consequences with respect to the payment of a retiring allowance over a number of years.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature and are not binding on the Canada Revenue Agency (CRA). All publications referred to herein can be accessed on the CRA website at the following address:

http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.html.

1. RCA Funding

In our file E9123315 dated December 4, 1991 we stated:

"An RCA arises upon a "contribution" by the employer for the purposes set out in the definition under subsection 248(1) of the [Income Tax] Act. If the earmarking constitutes a "contribution", an RCA is created. For example, the pledging of property as security for the RCA, letters of credit, mortgages or asset-backed guarantees would all constitute a contribution and cause an RCA to arise. It is also possible that simply setting aside assets (e.g. a second bank account) could constitute a contribution if the employee is identified with that asset. In other words, if any of the assets of the employer have been set apart from the assets that are available for the general creditors of the employer, a contribution can be considered to have occurred."

In general, subsection 248(1) of the Act defines an RCA as a plan or arrangement under which contributions are made by an employer of a taxpayer in connection with benefits that may be provided to the taxpayer or another person, after the retirement or the loss of employment of the taxpayer. The definition specifically requires that the contributions must be made to a third person who is referred to as the custodian. However, the post-amble of the RCA definition also ensures that the definition will apply to an arrangement under which a person holds property in trust, provided the arrangement would have been an RCA had the property been held by another person. Similarily, subsection 207.6(2) of the Act may also apply to an arrangement that provides retirement benefits, if an employer or a related person holds an interest in a life insurance policy that is used to fund those benefits. Under such an arrangement, the person holding the property will also be deemed to be the custodian of an RCA.

When funds are paid into a bank account in accordance with the terms of an arrangement that is established to provide retirement benefits, the payment may be considered to be a contribution and the financial institution may be considered to be either a custodian or a trustee. In either case, the arrangement could be an RCA. However, CRA recognizes that funds that are not specifically held in trust may not be held by the financial institution as a custodian but may be held in the account simply as part of the property of the account holder (even though they are held in conjunction with a retirement arrangement). Hence, CRA takes the position that where the funds on deposit are available to the general creditors of the employer a contribution to a custodian will not be considered to occur and an RCA will not be established.

2. Retiring Allowances

There is no provision in the Act that prohibits the payment of a retiring allowance in instalments. For example, as stated in paragraph 17 of Interpretation Bulletin IT-337R4, Retiring Allowances, an employee may have the option of receiving an amount either as a lump sum at the time of termination of employment or in instalments over a number of years provided the election to choose the instalment option is made on or before the termination of employment, before the employee is legally entitled to demand payment, and before the employer is obligated to pay the amount.

An employee must include a retiring allowance (or an instalment thereof) in income in the year in which it is received. An employer may deduct the amount as an expense in the year it is incurred subject to the provisions of subsection 78(4) of the Act. A retiring allowance may also be funded through contributions to an RCA in which case a deduction may be made for the contribution as provided under paragraph 20(r) of the Act, in the year in which the contribution is made.

We trust that these comments will be of assistance to you.

Yours truly,

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch