14 December 1989 Ministerial Letter 59058 F - Retirement Compensation Arrangement

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.

December 14, 1989

Dear Sirs:

Re:  Retirement Compensation Arrangement ("RCA")

This is in reply to your letter of November 7, 1989 in which you set out the following three hypothetical situations and ask for our comments on whether or not the RCA rules in the Income Tax Act (the "Act") apply to the arrangements described therein.

Situation I

A school board accumulates and invests funds in a separate trust administered by an external custodian.  The explicit terms of the trust arrangement are to facilitate the future funding of retiring allowances that will be payable to teachers as service awards upon their retirement.

The terms of the trust restrict the school board from accessing and using the funds that had previously been contributed to this trust for any purpose other than the payment of the teachers' service awards.

It is your view that the trust would constitute an RCA trust as defined in Part XI.3 of the Act.  Thus, you feel that the rules related to RCAs as outlined in the Act would become operative on all transactions between the school board, the trust and the retiring teachers.

Situation 2

A school board accumulates funds that are held in a bank account used to administer all deposits and cheques issued.  No trust relationship is established to administer the accumulation of funds to finance the payment of the retiring allowances to the teachers.

A contractual agreement exists between the school board and the teachers' union pursuant to which the school board accumulates funds in some manner to finance the retiring allowances to be paid to the teachers.

It is your view that the accumulation of funds within the school board's bank account would constitute an RCA.  You consider the key factor that would trigger the existence of an RCA is the contractual agreement to accumulate funds in order to finance the retiring allowances, even though no external trust relationship has been established.

Situation 3

A school board invests funds either within its own current bank account or in a separate investment account administered by a money manager.  No trust relationship is established that restricts the use of the funds and no contractual agreement exists between the school board and the teachers' union to accumulate funds to fund the retiring allowances.  It is at the option of the school board as to whether the retiring allowances are funded through accumulating funds over time or out of the current operating budget.

The school board accumulates excess funds through its operating budget each year which can be used for various special projects.  These special projects may include the funding of the teachers' service awards but they may also include, among other things, the acquisition of equipment for schools.  The school board is not required to seek approval from the superintendent of schools or the teachers' union as to the ultimate use of the excess funds accumulated.

From an accounting perspective, the school board records an annual accrual to reflect the accounting liability to fund the teachers' service awards.  This annual accrual is recorded whether or not the funds are actually set aside.  If the funds are actually accumulated, the amount of the investment may equal the liability recorded on the financial statements of the school board.

It is your view that this accumulation of funds would not constitute the establishment of an RCA.  Since there is no trust arrangement established or contractual agreement to accumulate funds for a specific purpose, you consider that it would be impossible to ascertain, at the time the funds are accumulated, whether the ultimate utilization of the funds would fall within the limited arrangements that would constitute an RCA.

Our Comments

We are unable to definitively reply to such queries except where they relate to a factual situation and we have had the opportunity of reviewing all the facts and related documentation.  Such a review is conducted by the relevant district taxation office where the query relates to a completed transaction, or by this office where the arrangement is the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R.  We nevertheless offer the following general comments.

The provisions of Part XI.3 of the Act apply only where an RCA exists.  An RCA is defined in subsection 248(1) of the Act.  Generally speaking, it is an arrangement under which contributions are made by an employer to a custodian (e.g., a bank, trust company or investment dealer) to fund an amount to be paid to an employee on, after or in contemplation of

(a)     any substantial change in the services rendered by the employee,

(b)     the employee's retirement, or

(c)     the loss of the employee's office or employment.

Given the above, our comments on the above three hypothetical arrangements are as follows:

A.     The definition of an RCA contains a number of exclusions, one of which is that an arrangement will not be an RCA if it is a salary deferral arrangement ("SDA") as defined in subsection 248(1) of the Act.  In this regard, we are uncertain of what is meant by the term "service awards". If an arrangement of the type described above in situation 1 is not an SPA, a question of fact, it would normally constitute an RCA.

B.      With respect to the type of arrangement described above in situation 2, a determination as to whether or not such an arrangement is an RCA can be made only after considering all relevant facts.  Where there is a contractual agreement between an employer and its employees providing for the accumulation of funds with respect to a future liability to pay retiring allowances, such funding with a third person (custodian) must in fact occur in order for there to be an RCA.  If the terms of the arrangement are such that the relevant funds are held by a custodian (e.g., a bank or the employer acting in a fiduciary capacity for the benefit of beneficiaries under the arrangement), the arrangement would normally be an RCA.

C.      The determination of whether or not an arrangement of the type described above in situation 3 is an RCA can be made only after a review of the facts relevant to a particular case.  The setting up of a "book reserve" without an accompanying segregation of assets will not of itself create an RCA.  However, given the possibility that an employer might also be the custodian of an RCA, we are not in a position to express a general view where assets are segregated.

The above comments reflect expressions of opinion only.  As stated in paragraph 24 of Information Circular 70-6R, such comments are not binding on the Department.  We trust, however, that they will be of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate