13 January 1992 Income Tax Severed Letter 9126145 - Employee Benefit Plan - EBP - Merger

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: EMPLOYEE BENEFIT PLAN, EBP, MERGER Section(s): 87(2)(j.3),
12(1)(n.1), 104(13), 104(6)]

• 5- 912614 D. Duff (613) 957-8953

XXX

Attention: XXX

January 13, 1992

Re: Employee Benefit Plans ("EBP")
Retirement Compensation Arrangements ("RCA")

This is in reply to your letter of September 5, 1991 requesting our opinion on the tax consequences of merging the funds in an EBP and an RCA.

You described a situation where two companies, referred to as A and B, merged to form AB. You indicated in a telephone conversation on December 11, 1991 (XXX/Duff) that A and B were corporations amalgamating pursuant to section 87 of the Income Tax Act ("Act"). Company A has an EBP set up in XXX prior to the introduction of the RCA and the salary deferral arrangement ("SDA', provisions. It was used to provide an additional pension for certain of its employees XXX Company B has an RCA for some of its employees.

Because of a new company policy restricting funding for only those employees over 50 years of age, company AB will retrieve the funds from the EBP related to the pension for the employee still working, and the remaining funds in the EBP will be transferred to the same trust company acting as trustee for the RCA. These remaining funds relate only to the XXX retired employees and, presumably, there will not be any further contributions on their behalf.

You asked us to confirm that the proposed transactions would not constitute substantial modifications to the EBP such that the EBP rules would no longer apply with respect to the assets remaining in the plan. You also asked if the amounts retrieved from the EBP by AB would be included in its income pursuant to paragraph 12(1)(n.1) and would there be any tax implications to the employee who was a beneficiary under the EBP. As your questions relate to specific proposed transactions they are more properly the subject of an advance income tax ruling. However, we can offer the following general comments.

The enacting provisions for RCAs require that grand-fathered plans that would otherwise meet the criteria will be considered an RCA with respect to contributions made after the earlier of January 1, 1988 and the day after October 8, 1986 when it was materially altered. Consequently, even if the plan had not been changed, contributions to it after January 1, 1988 will be considered to be contributions to a separate arrangement deemed to be an RCA but amounts already in the plan are deemed not to be an RCA by these same provisions.

The enacting provisions for SDAs exclude amounts deferred pursuant to a written agreement made before February 26, 1986 where the deferred amount is in respect of services rendered before July 1986 or services rendered after June 1986 but the employee was obliged to defer receipt and could not cancel that obligation. Consequently, if there are no changes to the rights of the XXX retired employees the plan would not become an SDA with respect to the amounts held on their behalf.

The tax consequences of a merger of two corporations are determined by section 87 of the Act. Paragraph 87(2)(j.3) states that the new corporation is deemed to be a continuation of each predecessor corporation in connection with certain aspects of an EBP, but, as noted therein, paragraphs 12(1)(n.1) and 104(13)(b) are not included. As a result, these provisions will not be applicable to the merged corporation unless it has contributed to the EBP as an employer after the merger.

An employee who receives benefits from an EBP would not be affected by the merger since he would still be taxed pursuant to paragraph 6(1)(g) on amounts received providing the EBP still exists. However, as indicated above if the funds are removed from the EBP and refunded later those subsequent contributions will be considered to be to a RCA. As previously mentioned, the exempting provisions that exclude certain plans from being an RCA do not apply to contributions to such plans made after January 1, 1988, regardless if such plans have been modified. Consequently, when AB refunds amounts to the plan to fund the pension for the employee under 50 years of age it will be deemed to be making contributions to an RCA.

It would be a question of fact whether the transfer of EBP funds from the EBP to the employer conveyed any benefit on the employee. When such funds are transferred the employee would have no more interest in the EBP. Paragraph 6(l)(g) of the Act includes in income any amount received from the disposition of an interest in an EBP. If he has agreed to the return of funds to the employer in return for something else it can be argued that he is receiving an amount for the disposition of his interest in the EBP. It is not something on which we can comment without reviewing all of the terms of the agreement and this would only be done in response to an advance income tax ruing.

We trust this is satisfactory and we wish to advise that this is an expression of opinion only and is not binding on the Department.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate