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.
Dear Sirs:
This is in reply to your letter of July 7, 1989, wherein you requested a technical interpretation on the applicability of subsections 6(9) and 80.4(1) of the Income Tax Act (the "Act") in the following hypothetical situation:
- • In year 1, an employer establishes a retirement compensation arrangement (the "Plan") as defined under subsection 248(1) of the Act for the benefit an employee. The employer makes a contribution of $1,000 to the Plan and withholds $500 of this amount pursuant to subsection 103(7) of the Income Tax Regulations.
- • The Plan earns $100 of income in year 1, so that the refundable tax, under subsection 207.5(1) of the Act, at the end of year 1 is $550. The custodian therefore pays a tax of $50 under subsection 207.7(1) of the Act.
- • In year 2, the employee retires. The Plan calls for a single lump-sum payment to be made to him equal to the fair market value of the assets of the Plan plus any refundable tax in respect of the Plan, ie: a total payment of $1,100. In order to pay the employee the amount of $1,100, the custodian borrows $550 from the employer on an interest-free basis. The Plan provides that the employer must make the loan if requested by the custodian.
- • The refundable tax in respect of the Plan at the end of year 2 is NIL so that the custodian ultimately receives a refund of $550 pursuant to subsection 207.7(2) of the Act which is used to repay the loan from the employer.
It is our general position that the interest free loan referred to in the above described situation would not result in the application of subsection 80.4(1) of the Act and would not be considered as a contribution by the employer to the Plan. However, it should be noted that the determination of whether a loan may or may not be considered as a contribution to an RCA trust can only be made after a detailed examination of all the relevant terms and conditions in each specific situation.
We trust the above comments will be of assistance to you.
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© Her Majesty the Queen in Right of Canada, 1989
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© Sa Majesté la Reine du Chef du Canada, 1989
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