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.
THE CONFERENCE FOR ADVANCED LIFE UNDERWRITING
1993 Annual Conference
Question 5
The terms of a non-registered supplementary employee retirement plan provide for the following arrangements:
(a) The employer has agreed to pay defined retirement benefits to selected employees.
(b) The employer will pay current "bonuses" to plan members during the period prior to their retirement.
(c) The employees will use the bonus funds (after paying personal tax) to acquire life insurance policies to be held as "security" for the payment of the future retirement benefits to be paid by the employer. The employer will not have any ownership interest in the policies.
(d) In the event of death before retirement, the life insurance proceeds will be paid to the beneficiary designated by the employee. The employer will have no obligation for the payment of any pre-retirement death benefit.
(e) After retirement, the employee agrees to designate the employer as the beneficiary of the policy to the extent of the employer's after-tax cost of all retirement benefits received plus accumulated interest thereon.
Under this arrangement:
1. Would the arrangement be an RCA as defined in subsection 248(1), or a deemed RCA pursuant to subsection 207.6(2)? If so, how would the rules relating to the payment and refund of tax be applied?
2. Provided that the "bonuses" and retirement benefits were reasonable in the circumstances, would the payment of such amounts be deductible in computing the income of the employer?
3. Would the receipt of life insurance proceeds either by the estate or beneficiaries of the employee or by the employer be tax-free?
Response
1. In this situation the Department probably would not consider these payments to be employment income to the employee or bonuses paid by the employer. The arrangement appears to be designed to fund retirement benefits via the acquisition of an insurance policy. Depending on the specific agreement the arrangement would probably be an RCA, either pursuant to the definition in subsection 248(1) or deemed as such pursuant to subsection 207.6(2).
Question 5
2. Since the Department would consider the bonuses to be contributions to an RCA, the employer would not get a deduction for these payments as salary but it would get a deduction pursuant to paragraph 20(1)(r) for contributions to an RCA. To the extent the retirement benefits are reasonable, the employer would get a deduction for them.
3. Distributions under these plans will be required to be included in the income of the recipient pursuant to paragraphs 12(1)(n.3), 56(1)(x) or (z).
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© Her Majesty the Queen in Right of Canada, 1993
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© Sa Majesté la Reine du Chef du Canada, 1993