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: Are the post-retirement benefits paid directly by the Employer to the retired employees in accordance with the Plan amounts paid as distributions to one or more persons under the RCA as described in paragraph (c) of the definition “refundable tax” in subsection 207.5(1)?
Position: No.
Reasons: As noted below.
CLHIA ROUNDTABLE QUESTION 3
Question 3 – Retirement compensation arrangements
Scenario
- XYZ Ltd. (the “Employer”) has implemented a supplemental executive retirement plan (the “Plan”) to offer reasonable benefits to selected executive members at the time of their retirement in recognition of their years of service.
- In connection with the Plan, the Employer has established a trust (the “LOC Trust”) such that the assets held in the LOC Trust are separate from the assets of the Employer.
- Trustco (the “Trustee”), a corporation that deals at arm’s length with the Employer, is the trustee of the LOC Trust.
- In accordance with the Plan, in case of bankruptcy of the Employer, the benefits that are to be paid from the Plan are required to be guaranteed by a letter of credit that is held in the LOC Trust.
- In accordance with the Plan, the Employer must make a contribution each year to the Trustee corresponding to twice the amount of the fee to renew or replace the letter of credit.
- The fee is paid to a bank by the Trustee.
- The annual fee to renew or replace the letter of credit is $100,000, so the Employer makes a contribution of $200,000 during the current taxation year.
- The Employer withholds and remits to the CRA 50% of the amount of the contribution made to the Trustee as Part XI.3 tax, such that the refundable tax on hand at the end of the preceding taxation year is $1,000,000.
- In accordance with the Plan, the Employer pays post-retirement benefits totaling $300,000 directly to the retired employees during the current taxation year.
Question
Are the post-retirement benefits paid directly by the Employer to the retired employees in accordance with the Plan amounts paid as distributions to one or more persons under the retirement compensation arrangement (“RCA”) as described in paragraph (c) of the definition “refundable tax” in subsection 207.5(1) of the Income Tax Act (the “Act”)?
CRA Response
An amount is not included under paragraph (c) of the definition “refundable tax” in subsection 207.5(1) of the Act in computing an RCA’s refundable tax unless it is an amount paid as a distribution under the RCA. In our view, an amount is not paid as a distribution under the RCA unless the amount is paid from property held in connection with the RCA. In the above situation, the amounts of the direct payments made by the Employer to retired employees of post-retirement benefits in accordance with the Plan are not amounts paid as distributions under the RCA and would not be taken into account under paragraph (c) of the definition.
Victor Pietrow
2017-069233
May 18, 2017
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