14 August 1990 Ministerial Correspondence 59544 F - Supplemental Pension 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.

Attention: 19(1)

August 14, 1990

Dear Sirs:

This is in reply to your letter dated February 6, 1990 in which you requested a technical interpretation with respect to the following situation.

We are to assume that an employer provides a registered pension plan (RPP) for its employees.  The RPP contains a defined benefit provision that provides a normal form of annual pension computed as a product of the number of years of eligible service and the average annual earnings over the most highly remunerated three-year period of employment of an employee with the employer.  The annual pension is limited to the maximum pension allowed by the Income Tax Act (the "Act"), the Income Tax Regulations (the "Regulations") and the rules established by Revenue Canada under the authority of the Act or the Regulations (the revenue rules).

The employer provides a supplemental pension arrangement ("SPA") that is not registered under the Act.  The terms of the SPA are the same as those of the RPP except that the normal form of annual pension payable under the SPA is the annual pension that would be payable under the RPP if this last pension were not subject to a maximum, less the pension payable under the RPP.  The SPA is considered to be a pension plan within the meaning of that expression as found in the applicable provincial pension standards legislation.

In order to assure payment of the supplemental pension to an employee, the employer establishes a trust that would be a retirement compensation arrangement (RCA) as defined in subsection 248(1) of the Act and arranges with a chartered bank to have the bank issue a a letter of credit in favour of the employee.

An annual fee is payable to the  bank for the issuance of the letter of credit.  A contribution is made by the employer to the RCA trust in the amount of twice the annual fee and the fee is paid to the bank by the trust. The amount payable under the letter of credit is the actuarial present value of the normal form of annual pension under the SPA.  Alternatively, the amounts payable under the letter of credit are the monthly pension amounts that would be payable under the SPA.

The letter of credit is issued for a term certain, not exceeding five years and it is irrevocable during its term.  The amount or amounts payable under the letter of credit are payable on the occurrence of an event of default.  Events of default would be the failure of the employer to pay the pension under the SPA, bankruptcy or receivership of the employer or failure to renew the letter of credit within a fixed period of its expiry.

In our view the SPA would not be a "salary deferral arrangement" as defined in subsection 248(1) of the Act, however, an RCA will arise upon its funding by the employer's contribution to the trust.  The contribution would be deductible by the employer under paragraph 20(1)(r) of the Act and one-half of such contributions would be required to be withheld and remitted to the Receiver General on account of Part X1.3 tax.

In our opinion, the following additional tax consequences will result in the described circumstances:

1.     Since the employee is the named beneficiary of the letter of  credit, we would view the value of the letter as being a benefit received by the employee at the time of its issue taxable under the provisions of paragraph 6(1)(a) of the Act.

2.     Any increases in the value of the letter of credit subsequent to issue would also be considered benefits received by the employee and taxable under paragraph 6(1)(a) of the Act to the extent that they arose as a consequence of the employment.

3.     The payments by the RCA trust of the annual fees for the letter of credit would be considered to be a benefit to the employer out of an RCA and therefore taxable under the provisions of paragraph 12(1)(n.3) and subsection 56(2) of the Act.

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

Yours truly,

for DirectorFinancial Industries Division  Rulings Directorate