8 September 1989 Internal T.I. 58367 F - Retirement Compensation Arrangement Rules

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.

September 8, 1989

Dear Sirs:

This is in reply to your letter dated July 11, 1989 in which you requested our views concerning the application of the retirement compensation arrangement ("RCA") rules in the Income Tax Act ("Act") to the following situations.

Situation 1

An employer enters into an agreement to provide retirement benefits to several key employees.  In order to fund these obligations the employer purchases an exempt life insurance policy on the life of each employee.  This arrangement is deemed to be an RCA by virtue of subsection 207.6(2) of the Act.  As a consequence, the interests in the life insurance policies are deemed to be property of the RCA.

One of the employees dies and the death benefit is paid to the corporation, who is obligated to use a portion of the proceeds to pay a death benefit to the estate of the deceased.  The remainder of the death benefit is used to pay the future premiums on the remaining life insurance policies.

It is your view that the full amount of the death benefit will be taxable to the employer by virtue of paragraphs 207.6(2)(d) and 12(1)(n.3) of the Act.  Further, the receipt of the death benefit by the employer in turn would be taken into account in determining the "refundable tax" as defined under subsection 207.5(1) of the Act, and any tax refunded to the employer would also be taxable to the employer under paragraphs 207.6(2)(d) and 12(1)(n.3).  In addition, the benefits paid by the employer to the estate of the deceased would be taxed as a "death benefit" as defined in subsection 248(1) of the Act.

We are in general agreement with your analysis.  Note that the amount of the benefits to be treated as a "death benefit" may be reduced by an amount of up to $10,000 depending upon the circumstances.

It is also your view that an amount equal to twice the premiums paid on the remaining life insurance plans out of the life insurance death benefit will be treated as a contribution to the plan pursuant to paragraph 207.6(2)(c) of the Act, and 50% of this contribution should be remitted to Revenue Canada as refundable tax.

We agree with your analysis.

Situation 2

In this fact situation the employer establishes a trusteed RCA to provide the retirement benefits.  Contributions are made by the employer to the trustee, who in turn purchases and owns exempt life insurance policies on the lives of the key employees.

Similar to the first fact situation, one of the key employees dies, and the RCA uses a portion of the life insurance death benefit to pay an amount to the estate of the deceased.  The reminder of the life insurance death benefit is used to fund future premium payments on the remaining life insurance policies.

In this situation it is your view that the deceased's estate will be taxable under paragraph 56(1)(x) of the Act.  This payment will be taken into account in determining the refundable tax of the RCA under subsection 207.5(1) of the Act.  The remainder of the death benefit retained by the RCA will not be treated as income to either the RCA trust or the employer.  The use of the death benefit to pay future premiums under the life insurance policies will not be treated as a contribution to the RCA, and therefore will not generate the payment of refundable tax.  However, any income earned by the RCA trust on the life insurance death benefit will be subject to refundable tax.

We agree with your analysis.

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

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate