4 June 1991 External T.I. 9106115 F - The Use of Letters of Credit

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.

5-910611

Dear Sirs:

Re:  The Use of Letters of Credit

We are writing in reply to your letter of February 21, 1991, in which you ask several questions concerning a supplementary pension arrangement to be funded by a letter of credit upon the occurrence of one of several contingencies.

Where confirmation is sought on the tax implications arising out of a particular arrangement, the Department is prepared to give such confirmation only where a review of all relevant facts and related documentation justify it.  Such a review would be conducted by this office where the arrangement is the subject matter of an advance ruling request outlined in the manner set out in Information Circular 70-6R2.  We can offer the following general comments, however.

One of the prerequisites for the creation of a trust is the settling of property upon it.  Likewise, a retirement compensation arrangement ( RCA") can only arise where a contribution of property is made by the employer to the "custodian".  Since property is settled when the letter of credit is issued in the name of the trust upon the instructions of the employer, it is our view that a contribution has been made and a RCA is constituted so long as the other conditions in subsection 248(1) of the Income Tax Act "the Act") are met.

An annual fee paid directly by the employer to the bank would be considered a contribution to a RCA and would be deductible to the employer.  It would not constitute a taxable benefit to the employee; however, note that as a contribution to an RCA the fee would be subject to withhold of the refundable tax.

We cannot answer your last question concerning the value of the letter of credit except to advise that the fair market value of any letter of credit depends on the circumstances of its issue, such as when it becomes payable, the restrictions on payment, the credit worthiness of the employer, the intent of the parties to the transaction, etc.

We hope the foregoing comments are helpful, although we point out that they are not binding on the Department.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate