28 July 1993 Income Tax Severed Letter 9318915 - RCAs and 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.

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.

                                              931891
XXXXXXXXXX                                    P. Spice
                                              (613) 957-8953

Attention: XXXXXXXXXX

July 28, 1993

Dear Sirs:

Re: Retirement Compensation Arrangements (RCAs)

This is in reply to your letter of June 25, 1993, in which you ask several questions concerning the use of letters of credit and the application of the RCA rules under the Income Tax Act (the "Act"). Our comments follow.

Where a company obtains a letter of credit to secure its obligation to fund retirement benefits for its employees, the fair market value of the letter of credit will be considered a contribution to the RCA and subject to tax under Part XI.3 of the Act. (See Department's answer to Question 29 of the Canadian Tax Foundation 1988 Conference 0Report).

A contractual obligation by the company to prepay the amount of the letter of credit to the bank on demand would not constitute a contribution to an RCA in and of itself; however, it should be noted that any payment to or under the RCA by the bank under the terms of the letter of credit is considered a contribution to the RCA subject to the RCA tax since such a payment is made on behalf of, and is repayable by, the employer.

An unsecured guarantee to pay the bank is not a contribution to an RCA whether given by the company or its parent. (See Department's answer to Question 6 of the Canadian Tax Foundation 1990 Conference Report).

If assets are pledged by the company to secure its liability under the letter of credit and such assets are no longer available to the general creditors of the company, this would be considered a separate contribution to an RCA.

Where an employer obtains a letter of credit and, in addition to the fee charged by the bank, the employer must pledge assets, the amount of both contributions to the RCA, in our view, would be equal to the lesser of the total of the fair market values of both the letter of credit and the pledged assets and the face amount of the letter of credit. Please note that the Department does not provide advance rulings on the fair market value of a property nor does it as a general rule predetermine the fair market value of a property in any other context. The determination of the fair market value of a property is the responsibility of the employer and the RCA custodian. The Department would become involved only after the fact and only if it considered the value assigned to a property to be unreasonable in the circumstances.

Although the foregoing comments are an expression of opinion only and not binding on the Department, we trust they are helpful.

Yours truly,

for Director Financial Industries Division Rulings Directorate