29 August 1989 Income Tax Severed Letter 5-8342 - Employee benefit plan

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 4, 1989 with documents enclosed concerning the above-mentioned subject.

We do not give opinions in respect of factual completed transactions and therefore suggest you consult your local district taxation office to ascertain the income tax implications, We will, however, offer the following general comments.

A plan that was an Employee Benefit Plan ("EBP") prior to October 9, 1986 that also meets the definition of a Retirement Compensation Arrangement ("RCA") will be governed by the EBP rules provided no material alterations are made to the plan after October 8, 1986 and no contributions are made under the plan after December 31, 1987. Such a plan would. have the following tax implications for the plan and its members.

• 1) The EBP is taxable under Part I of the Income Tax Act (the "Act") on its annual income which is not paid to its beneficiaries in the year it is earned.
• 2) Amounts received out of the EBP are taxable as employment income in the year of receipt pursuant to paragraph 6(1)(g) of the Act.
• 3) Amounts received under or out of the EBP are not eligible for a rollover into a Registered Retirement Savings Plan or a Registered Pension Plan under paragraph 60(j.1) of the Act. Where a plan provides that income earned in the EBP be paid to the employer subject to its repayment to the EBP, such income will be taxed in the hands of the EBP.
• Notwitstanding that the payments from the EBP trust to the employer are not deductible from the income of the EBP trust, the recontributions by the employer to the plan, if made after December 31, 1987, will be considered to be contributions to a "statutory arrangement" as that term is defined in the coming into force provisions of the RCA Definition contained in subsection 248(1) of the Act and therefore subject to withholding provisions of Paragraph 153(1)(p) of the Act. In addition, although any further payments to the employer from the plan will be deemed to be paid first out of the RCA pursuant to paragraph 56(10) of the Act (and therefore included in the employer's income pursuant to paragraph 12(1)(n.3) of the Act to the extent that they are from the RCA), the amounts, as part of a series of payments and refunds of contributions under the RCA, will not apply to reduce the amount of refundable tax otherwise payable by the RCA pursuant to paragraph 207.5(1)(c) of the Act.

An EBP will become a Salary Deferral Arrangement ("SDA") on February 26, 1986 provided all the conditions mentioned in the definition of an SDA as stipulated in subsection 248(1) of the Act are met.

The accumulated contributions made prior to this date will remain subject to the rules of an EBP and be taxed upon their receipt.

The grandfather treatment applies in the case of an SDA in respect of a taxpayer to the extent that the deferred amounts relate, or may reasonably be considered to relate, to services rendered by the taxpayer before July 1986. For example, an employee benefit plan would not be an SDA to the extent that all contributions to the plan were in respect of services rendered by the participating employees before July 1986.

Also excluded are plans or arrangements to the extent that the deferred amounts relate, or may reasonably be considered to relate, to services rendered after June 1986 and where both of the following conditions are met:

• • the employer is legally obligated to defer payment of these amounts to the employee pursuant to an agreement in writing made with his employee or former employee before February 26, 1986; and
• • the employee cannot, at any time after June 1986, cancel or otherwise avoid that obligation.

The result is that where the first condition is satisfied, grandfather treatment does not apply to a deferred amount after June 1986 that relates to services rendered after that date if, under the terms of the arrangement, the employee may take any action to cause the deferral not to occur. For example, if the deferral is to continue under the arrangement after June 1986 until the employed otherwise directs, deferred amounts after June are not eligible for grandfather treatment. The same result would apply if these deferrals Continue but under the terms of the arrangement the employee can direct that the deferred amounts be nil.

We trust the above comments will be of assistance to you.