26 April 1993 Income Tax Severed Letter 9305037 - RCA—SDA

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.

                                              April 20, 1993

      WINNIPEG TAXATION CENTRE                HEAD OFFICE
      RCA Unit                                Financial Industries
                                                Division
      Attention:  Allison Day                 M. Shea-DesRosiers
                                              (613) 957-8953

                                              7-930503

      Whether a Retirement Compensation Arrangement (RCA)
         or a Salary Deferral Arrangement (SDA)            

This is in reply to your Fax of February 7, 1993 with an attached document dated April 20, 1988 (pages 12-50 to 12- 52) concerning a proposal to implement an RCA.

The question is whether the proposed plan is an RCA. It is our opinion that the plan proposed does not comply with the provisions of an RCA since it is not funded by the employer. To this effect, we refer you to the definition of an RCA at subsection 248(1) of the Income Tax Act (the "Act") which states that an RCA means " a plan or an arrangement under which contributions ... are made by an employer or former employer of a taxpayer, or by a person with whom the employer or former employer does not deal at arm's length,...". In the present situation, the plan is entirely funded with employees' contributions (p.12-51 of the document under Rationale, first 2 paragraphs).

It is our opinion, from the few pages of the document submitted, that the proposed plan would be an SDA which is defined at subsection 248(1) of the Act to be "a plan or an arrangement, whether funded or not, under which any person has a right in a taxation year to receive an amount after the year where it is reasonable to consider that one of the main purposes for the creation or existence of the right is to postpone tax under this Act ... is on account or in lieu of, salary or wages of the taxpayer for services rendered ...".

For purposes of discussion, we will assume that an employee benefit plan (EPB) as defined under subsection 248(1) of the Income Tax Act existed prior to February 26, 1986, that is an arrangement under which the employer made contributions to another person (the custodian) under which one or more payments were made by the custodian to or for the benefit of the employees, former employees or persons not dealing at arm's length with them. Contributions were made to the said plan up to December 31, 1987. The grandfather treatment would apply to such a plan to the extent that the deferred amounts relate, or may reasonably relate, to services rendered by the taxpayer before July 1986. Also excluded are plans or arrangements to the extent that the deferred amounts relate, or may reasonable be considered to relate to services rendered after June 1986 and where both of the following conditions are met:

      - the employer is legally obligated to defer payment
        of these amounts to the employee and pursuant to an
        arrangement in writing made with his/her employee or
        former employee before February 26, 1986; and 

      - the employee cannot, at any time after June 1986,
        cancel or otherwise avoid that obligation.

Accordingly, if the above conditions are met, the accumulated contributions made to the plan to December 31, 1987 would remain subject to the rules of an EBP and would be taxed upon their receipt.

If the arrangement was not an EBP as of February 26, 1986, as defined in subsection 248(1) of the Act, then the plan that existed on such a date, could have become an SDA if all the conditions mentioned in the definition of an SDA were met.

The plan in question would have to be reviewed to determine whether it was an EBP or not in order to apply the appropriate dispositions of the Act. Should you need further information, you can reach Mrs. M. Shea-DesRosiers at the above-mentioned telephone number.

We trust the above comments will be of assistance to you.

Chief Financial, Leasing and Deferred Income Plans Section Financial Industries Division Rulings Directorate