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: Will the proposed SERPs be an SDA?
Position: No.
Reasons: The SERPs will provide for reasonable pension benefits and therefore none of the main purposes will be to postpone the payment of tax.
XXXXXXXXXX
2020-085832
XXXXXXXXXX, 2021
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request – DC SERP
XXXXXXXXXX(the “Taxpayer”)
This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling (“Ruling”) on behalf of the above-named Taxpayer. We also acknowledge the information provided by email and in telephone conversations.
To the best of your knowledge and that of the taxpayers involved, none of the proposed transactions or issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:
i. in a previously filed tax return of the Taxpayer, a SERP DC Member, or a related person and:
A. being considered by the CRA in connection with such return;
B. under objection by the Taxpayer, a SERP DC Member, or a related person; or
C. the subject of a current or completed court process involving the Taxpayer, a SERP DC Member, or a related person; or
ii. the subject of a Ruling request previously considered by the Income Tax Rulings Directorate, other than advance income tax ruling 2006-0203271R3.
Definitions
Unless otherwise stated: (i) all references to a statute are to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the Act) or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the Regulations); (ii) all terms and conditions used in this Ruling request that are defined in the Act (or in the Regulations) have the meaning given in such definition; (iii) all references to monetary amounts are in Canadian dollars; and (iv) the singular should be read as plural and vice versa where the circumstances so require.
1. In this Ruling request, unless otherwise noted, the following terms have the meanings ascribed to them below.
(i) “Actual Compensation” of a SERP DC Member for a calendar year means, in respect of a SERP DC Benefit, the total of (i) the base salary that the SERP DC Member receives from the Company for that calendar year, and (ii) the bonus or incentive compensation that the SERP DC Member receives from the Company for that calendar year which is paid no later than 3 months after the end of that calendar year. Actual Compensation during a period of disability or leave of absence will be deemed to be at the rate of Actual Compensation in effect immediately prior to becoming disabled or prior to the leave. For greater clarity, Actual Compensation will exclude any lump-sum payment of banked vacation or severance.
(ii) “Beneficiary” means the person or persons designated by the SERP DC Member to receive benefits under the SERP in the event of the death of the SERP DC Member after retirement.
(iii) “CEO” means the Chief Executive Officer of the Taxpayer on XXXXXXXXXX and any other person who becomes the Chief Executive Officer of the Taxpayer thereafter.
(iv) “CEO SERP” means XXXXXXXXXX Supplementary Executive Retirement Plan for the Chief Executive Officer, which was established effective XXXXXXXXXX.
(v) “Company” means the Taxpayer, or any subsidiary, affiliate or successor organization, and any action to be taken, consent, approval or opinion to be given, discretion or decision to be exercised by it may be done through its Board of Directors or any persons authorized directly or indirectly by that Board of Directors for purposes of this SERP.
(vi) “Continuous Service” means the period of the SERP DC Member’s uninterrupted service with the Company, as shown on the Company’s records calculated from the SERP DC Member’s last date of hire with the Company and ending on the date the SERP DC Member retires, dies or otherwise terminates employment, whichever comes first, and includes
(A) periods of disability or leave of absence as the Company designates for this SERP, and
(B) periods of part-time employment based on the ratio of the number of hours worked to the number of hours in the period for a full-time employee.
(vii) “CRA” means the Canada Revenue Agency.
(viii) “Earnings” of a SERP DC Member for a calendar year means the base salary that the SERP DC Member receives from the Company for that calendar year.
(ix) “Employer” in respect of a SERP DC Member means the employer within the Company that participates in the RPP and is the employer of the SERP DC Member.
(x) “Executive” means
(A) in the case of the VP SERP, a Senior Vice President or Vice President of the Taxpayer or participating subsidiary or affiliate on or after XXXXXXXXXX; and
(B) in the case of the CEO SERP, the Chief Executive Officer of the Taxpayer on XXXXXXXXXX and any other person who becomes the Chief Executive Officer of the Taxpayer thereafter.
(xi) “Maximum DC SERP Amount” of a SERP DC Member for a calendar year means the excess, if any, of
(A) 18% of the Actual Compensation of the SERP DC Member for the calendar year
over
(B) the RPP Limit of the SERP DC Member for the calendar year.
(xii) “Member” means an employee of a participating employer within the Company who is eligible to enroll in, and who has enrolled in and become a member of, the RPP.
(xiii) “RPP Limit” of a SERP DC Member for a calendar year means the lesser of
(A) the “money purchase limit” for the calendar year as defined in subsection 147.1(1), and
(B) 18%of the Actual Compensation of the SERP DC Member for the calendar year.
(xiv) “Normal Form” means the SERP DC Benefit will be paid to a SERP DC Member as follows:
(A) unless paragraph (B) applies, in ten installment payments, where the first installment payment is one tenth of the balance in the SERP DC Member’s SERP DC Account at the date of payment, and the remaining installment payments will be paid on the next following nine anniversaries of the date of payment, equal to one-ninth, one-eighth, one-seventh, one-sixth, one-fifth, one-fourth, one-third, one-half and 100%, respectively, of the balance in the SERP DC Account on each date of payment; or
(B) if an election specifying a smaller number of installments has been made by the SERP DC Member before the first payment of the SERP DC Benefit is due and subject to the approval of the Taxpayer, in the specified number of installment payments, where each installment payment is a proportion of the balance in the SERP DC Account on the date of payment of that installment and the timing and proportion of such installment payments is determined in the manner described in paragraph (A) but adjusted to reflect the smaller number of installments.
(xv) “Optional Form” means the SERP DC Benefit will be paid to a SERP DC Member as a lump sum amount equal to the balance in the SERP DC Member’s SERP DC Account at the date of payment.
(xvi) “Pensionable Service” of a SERP DC Member means the period of the SERP DC Member’s uninterrupted service with the Company during which the Vice President was participating in the RPP as shown on the Company’s records calculated from the date the Vice President joined the RPP and ending on the date the SERP DC Member retires, dies or otherwise terminates employment, whichever comes first, and includes:
(A) periods of disability or leaves of absence as the Company designates for purposes of this SERP,
(B) periods of part-time employment, based on the ratio of the number of hours worked to the number of hours in the period for a full-time employee, and
(C) periods of employment with a participating subsidiary or affiliate as the Company designates for purposes of this SERP.
(xvii) “RPP” means XXXXXXXXXX, a registered pension plan established by the Taxpayer, as amended or restated from time to time.
(xviii) “SERP” means the VP SERP or the CEO SERP, as the context requires.
(xix) “SERP DC Account” means an individual account established and maintained by the Company under a SERP in respect of each SERP DC Member.
(xx) “SERP DC Benefit” means the benefit payable under XXXXXXXXXX of a SERP to a SERP DC Member who
(A) in the case of the VP SERP, ceases Pensionable Service for any reason other than death, and
(B) in the case of the CEO SERP, ceases Continuous Service for any reason other than death.
(xxi) “SERP DC Member” means who is
(A) in the case of the VP SERP, a VP appointed to the position of Vice President on or after XXXXXXXXXX who elects to participate in XXXXXXXXXX of the VP SERP and accrue a SERP DC Benefit; and
(B) in the case of the CEO SERP, a CEO who is designated on or after XXXXXXXXXX by the Taxpayer to participate in XXXXXXXXXX of the CEO SERP and accrue a SERP DC Benefit.
(xxii) “Service” means
(A) in the case of the VP SERP, Pensionable Service, and
(B) in the case of the CEO SERP, Continuous Service.
(xxiii) “Spouse” of a SERP DC Member means, at the time a determination of marital status is required, a person who meets the definition of Spouse under the RPP in respect of the SERP DC Member.
(xxiv) “Target Compensation” of a SERP DC Member for a month in a calendar year means, in respect of a SERP DC Benefit, the total of (i) the base salary that the SERP DC Member receives from the Company for that month, and (ii) one-twelfth of the SERP DC Member’s target bonus or incentive compensation for that calendar year which is expected to be paid no later than 3 months after the end of such calendar year, all as determined by the Company. Target Compensation during a period of disability or leave of absence will be deemed to be at the rate of Target Compensation in effect immediately prior to becoming disabled or prior to the leave. For greater clarity, Target Compensation will exclude any lump-sum payment of banked vacation or severance.
(xxv) “VP” means a Senior Vice President or Vice President of the Taxpayer or participating subsidiary or affiliate on or after XXXXXXXXXX.
(xxvi) “VP SERP” means XXXXXXXXXX Supplementary Executive Retirement Plan for Vice-Presidents, which was established effective XXXXXXXXXX.
FACTS
A complete description of all the relevant facts is as follows:
2. XXXXXXXXXX
3. The Taxpayer is a “taxable Canadian corporation” for purposes of the Act.
4. The RPP is a defined contribution pension plan that is registered under the Act under CRA registration number XXXXXXXXXX. The RPP provides Members with benefits on a defined contribution basis, subject to the maximum contributions and benefits permitted for a defined contribution registered pension plan under the Act.
5. A Member of the RPP and the Member’s Employer are required to make contributions to the RPP for a calendar year based on the option selected by the Member from the following 3 options:
(i) Option 1 – the Member contributes XXXXXXXXXX% of the Member’s Earnings and the Member’s Employer contributes XXXXXXXXXX% of the Member’s Earnings for a total of XXXXXXXXXX% of the Member’s Earnings,
(ii) Option 2 – the Member contributes XXXXXXXXXX% of the Member’s Earnings and the Member’s Employer contributes XXXXXXXXXX% of the Member’s Earnings for a total of XXXXXXXXXX% of the Member’s Earnings, and
(iii) Option 3 – in the case of a Member who was hired before XXXXXXXXXX (other than a Member who was rehired following termination of employment), the Member and the Member’s Employer contribute the percentage of the Member’s Earnings based upon the Member’s years of Continuous Service specified in the following table:
Years of Continuous Member Employer Total
Service Contribution Contribution Contribution
XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
6. A Member who switches from Option 3 to Option 1 or Option 2 may not thereafter switch back to Option 3. A Member may switch between Option 1 and Option 2 (or vice versa) but, as described in paragraph 9 below, a Member who contributes to the RPP under Option 2 is not eligible to become, or continue to be, a member of a SERP.
7. The Taxpayer has also established the two SERPs – that is, the VP SERP and the CEO SERP – which are the subject of this Ruling request.
(i) Effective XXXXXXXXXX, the Taxpayer established the CEO SERP. The CEO SERP provides a defined benefit pension to its Chief Executive Officer based on the Chief Executive Officer’s basic salary and service with the Company, offset by the pension provided under other Company-sponsored retirement arrangements in which the Chief Executive Officer participates.
(ii) Effective XXXXXXXXXX, the Taxpayer established the VP SERP. The VP SERP provides a defined benefit pension to a Vice President based on the Vice President’s basic salary and service with the Company, offset by pension and other benefits provided under other Company-sponsored retirement and severance arrangements in which the Vice President participates.
8. Each SERP is an unregistered and unfunded retirement plan. The SERPs were established for the purpose of providing additional retirement benefits to participating Executives in excess of those provided under the RPP.
9. Under the terms of the VP SERP, a Vice President can only become, and continue to be, an active participant if the Vice President is making contributions to the RPP at the highest rate permitted under the RPP (that is, under Option 1 or, if applicable, under Option 3).
10. A Vice President may cease to be an active participant in the VP SERP but remain employed by the Company either because the Vice President ceases to qualify for participation or because the Vice President is appointed to be the Company’s Chief Executive Officer and is designated to participate in the CEO SERP. If a Vice President ceases to be an active participant in the VP SERP but remains employed by the Company, the Vice President will cease to accrue further benefits under the VP SERP.
11. On XXXXXXXXXX, the Board of Directors of the Taxpayer resolved that:
(i) with respect to the CEO SERP, effective XXXXXXXXXX, the CEO SERP shall be amended to provide benefits on a defined contribution basis (the details of which will be adopted at a later time) for members who join the CEO SERP on and after XXXXXXXXXX;
(ii) with respect to the VP SERP, effective XXXXXXXXXX, the VP SERP shall be amended to provide benefits on a defined contribution basis (the details of which will be adopted at a later time) for members who join the VP SERP on and after XXXXXXXXXX, other than a Vice President who has accepted an offer of employment before XXXXXXXXXX which offer included participation in the defined benefit component of the VP SERP; and
(iii) the appropriate officers of the Company are authorized to prepare and adopt amended and restated plan texts for each of the SERPs as at XXXXXXXXXX to reflect the amendments, including the adoption of defined contributions for the plans, and such further amendments as may be advisable to reflect current administrative practices for the plans.
12. The Company has a bonus or incentive compensation plan that establishes a target bonus or incentive compensation amount for a calendar year of service for each employee eligible for such a payment under that plan. The actual amount of the bonus or incentive compensation for an Executive for a calendar year of service is determined annually after the end of the calendar year of service and is based upon the performance of the Company and the personal performance of the Executive in that calendar year of service.
13. Historically, the amount of an Executive’s actual bonus or incentive compensation for a calendar year of service has exceeded the target bonus or incentive compensation for that calendar year of service for that Executive. The payment of the bonus or incentive compensation for a calendar year of service is generally made on or about the end of the month of XXXXXXXXXX next following the end of the calendar year of service.
PROPOSED TRANSACTIONS
Subject to obtaining favourable advance income tax rulings requested herein and the approval by a senior officer of the Company of the amended SERPs, the Taxpayer proposes to engage in the transactions contemplated herein.
14. The CEO SERP will be amended, effective as of XXXXXXXXXX, among other things, to add a XXXXXXXXXX to that SERP to provide benefits on a defined contribution basis for any new Chief Executive Officer of the Company who is appointed on or after XXXXXXXXXX and is designated by the Company to participate under the defined contribution provisions of that SERP. If, however, immediately prior to such appointment, the Chief Executive Officer was a Vice President who was participating in the defined benefit component of the VP SERP, the Company may, in its absolute discretion, designate the Chief Executive Officer to accrue benefits on a defined benefit basis.
15. The VP SERP will be amended, effective as of XXXXXXXXXX, among other things, to add a XXXXXXXXXX to that SERP to provide benefits on a defined contribution basis for any new Vice President appointed by the Company on or after XXXXXXXXXX (other than a Vice President who had accepted an offer of employment before XXXXXXXXXX which offer included participation in the defined benefit component of the VP SERP).
16. The defined contribution provisions in XXXXXXXXXX will apply only to a SERP DC Member in respect of eligible service on or after XXXXXXXXXX.
17. Under XXXXXXXXXX of a SERP,
(i) The Company will maintain a SERP DC Account for each SERP DC Member. A SERP DC Member’s SERP DC Account and any SERP DC Benefits shall be unfunded and unsecured.
(ii) Subject to the adjustment described in paragraph 17(iii) below, in respect of each month of Service for which contributions are made to the SERP DC Member’s account under the RPP in accordance with paragraph 5, the Company will make notional contributions to the SERP DC Member’s SERP DC Account in an amount, if any, equal to the excess of
(A) 10%of the SERP DC Member’s Target Compensation for such month
over
(B) the amount of Company contributions made to the SERP DC Member’s account under the RPP for such month.
(iii) If the total of the amounts in paragraph 17(ii) for such calendar year exceeds the Maximum DC SERP Amount of the SERP DC Member for the calendar year, then
(A) the total of the notional contributions to the SERP DC Member’s SERP DC Account for the calendar year will be reduced by the amount of the excess and by the notional investment returns credited to such excess; and
(B) subject to paragraph 20, the SERP DC Member’s Employer will pay, as soon as possible, the excess in a lump sum to the SERP DC Member (or, if the SERP DC Member has died, to the SERP DC Member’s Spouse if there is a Spouse).
(iv) The notional contributions, if any, in respect of a SERP DC Member for a month in a calendar year will be credited to the SERP DC Member’s SERP DC Account not less frequently than annually, in the manner determined by the Company.
(v) The notional contributions, if any, in respect of a SERP DC Member will be credited with notional investment returns to reflect the returns under a pooled investment fund as selected by the Company from time to time from the pooled investment fund options available under the RPP, and such notional investment returns will be credited to the SERP DC Member’s SERP DC Account.
(vi) If a SERP DC Member ceases Service for any reason other than the death of the Executive, the SERP DC Member’s Employer will pay the SERP DC Benefit
(A) in the Normal Form, or
(B) in the Optional Form if an election has been made before the first payment of the SERP DC Benefit is due.
18. If the SERP DC Member dies before payments of the SERP DC Benefit have commenced, the SERP DC Member’s Employer will pay the balance in the SERP DC Member’s SERP DC Account in a lump sum to the Spouse or, if the SERP DC Member and the Spouse have jointly waived the Spouse’s entitlements under the RPP, to the Beneficiary if there is a Beneficiary. If the SERP DC Member dies after payments of the SERP DC Benefit have commenced, the SERP DC Member’s Employer will pay the balance in the SERP DC Member’s SERP DC Account in a lump sum to the Beneficiary if there is a Beneficiary.
19. The SERP DC Member’s SERP DC Account will continue to be credited with notional investment returns in accordance with paragraph 17(v) above until the balance in the SERP DC Member’s SERP DC Account has been paid to the SERP DC Member, Spouse or Beneficiary, as applicable (including, in the case of the VP SERP, if the SERP DC Member ceases to be an active participant in the VP SERP but remains employed by the Company as described in paragraph 10 above).
20. Upon amending, and adding XXXXXXXXXX to, the CEO SERP and the VP SERP, the Company will establish a SERP DC Account for each SERP DC Member effective as of XXXXXXXXXX and make notional contributions to each SERP DC Member’s SERP DC Account in accordance with XXXXXXXXXX for the XXXXXXXXXX calendar year. Based upon the Actual Compensation and Target Compensation for each SERP DC Member for the XXXXXXXXXX calendar year, no lump sum payment will be required to be made in respect of any SERP DC Member for the XXXXXXXXXX calendar year as described in paragraph 17(iii)(B) above.
21. A SERP DC Member’s participation in a SERP (including, any notional contributions and returns credited to the SERP DC Member’s SERP DC Account) will not be in lieu of any amounts to which the SERP DC Member would otherwise be entitled by virtue of employment with the Company. In particular, there will be no reduction of salary or wages that would have otherwise been paid to the SERP DC Member as a consequence of the SERP DC Member’s participation in a SERP (including, any notional contributions and returns credited to the SERP DC Member’s SERP DC Account).
22. The Company’s practices with respect to its bonus and incentive compensation payable to its Executives will not be affected as a result of, nor in connection with, the addition of XXXXXXXXXX to the SERPs and a SERP DC Member’s participation in a SERP.
PURPOSE OF THE PROPOSED TRANSACTIONS
23. XXXXXXXXXX of the CEO SERP and of the VP SERP are being established to provide Executives who enroll under, or are designated by the Company to participate under, the defined contribution provisions of those SERPs with additional superannuation or pension benefits in excess of those provided under the RPP.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:
A. Neither XXXXXXXXXX of the CEO SERP nor XXXXXXXXXX of the VP SERP will be a “salary deferral arrangement” as defined in subsection 248(1).
B. Neither XXXXXXXXXX of the CEO SERP nor XXXXXXXXXX of the VP SERP will be a “retirement compensation arrangement” as defined in subsection 248(1).
C. No amount will be included in the income of a SERP DC Member under subsection 5(1) or paragraph 6(1)(a) as a result of, in and by itself, the Member’s participation in XXXXXXXXXX of the CEO SERP or the VP SERP as the case may be.
D. Any payment made under the terms of XXXXXXXXXX of the CEO SERP or the VP SERP (as the case may be) to a SERP DC Member, a Spouse or a Beneficiary will be included in the income of the recipient in the year the payment is received as a “superannuation or pension benefit” under subparagraph 56(1)(a)(i).
E. Subject to subsection 18(1), section 67 and section 78 , subsection 9(1) will apply to allow the SERP DC Member’s Employer to deduct any amount paid to the SERP DC Member, Spouse or Beneficiary under XXXXXXXXXX of a SERP in the taxation year in which the Employer is required to pay the amount.
F. Subsection 12(4) will not apply to a SERP DC Member to include any amount in computing the SERP DC Member’s income for a year as interest in respect of any entitlements the SERP DC Member may have under XXXXXXXXXX of a SERP.
These rulings are subject to the limitations and qualifications set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations, dated September 29, 2020 and are binding on the CRA provided that the Proposed Transactions described in paragraphs 14 and 15 are completed by XXXXXXXXXX.
The above rulings are based on the law as it reads at the date of this letter and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of any tax consequences relating to the facts and proposed transactions herein, other than those specifically described in the rulings given above. The documentation submitted with your request that is not described above does not form part of the facts and transactions and any references to the documentation are provided solely for the convenience of the reader.
Yours truly,
XXXXXXXXXX
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
UNCLASSIFIED
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