5 December 1994 External T.I. 9428145 - RCA FOR OWNER-MANAGER

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.

Principal Issues:

1)Whether a funded arrangement for the owner-employee of a CCPC is an SDA or RCA.

2)If it is an RCA, whether 56(11) will apply if RCA funds loaned to employer.

Position TAKEN:

1)Question of fact - it is an SDA if it is deferred compensation and an RCA if retiring allowance or pension benefits results.

2)Question of fact - will apply if employer does not compensate RCA at fair market value for use of funds.

Reasons FOR POSITION TAKEN:

1)Routine - see 921803; also cited CTF Question re reducing small business income by salaries/bonus to level required for s. 125 deduction - see 941845.

2)New - but merely restated words of provision.

XXXXXXXXXX		942814

Attention: XXXXXXXXXX

December 5, 1994

Dear Sirs:

Re: Retirement Compensation Arrangement (RCA) for Owner-Manager of Employer

This is in reply to your letter of October 25, 1994, in which you describe a situation involving the creation of an employer-funded arrangement for an owner-manager. You ask whether the arrangement would be considered an RCA. Assuming it is an RCA, you also ask whether subsection 56(11) of the Income Tax Act (the "Act") will apply where monies in the fund are loaned to the employer at a rate of interest that would be equal to or greater than the rate which could be obtained on an alternative investment.

Your request relates to specific proposed transactions. As indicated in Information Circular 70-6R2, we do not express opinions on specific proposed transactions other than as a reply to an advance income tax ruling. We are prepared to offer, however, the following general comments.

You indicated that the employer would fund the arrangement in an amount equal to the excess of the employer's pre-tax income over $200,000 (the "business limit" as defined in subsection 125(2) of the Act). We refer you to the Department's comments in part 3 of its response to Question 42 of the 1981 Canadian Tax Foundation Revenue Canada Round Table. Although the response relates to the payment of salaries and bonuses to principal shareholder-managers of a Canadian-controlled private corporation, we confirm that the position applies equally to the determination, for the purposes of section 67 of the Act, of the reasonableness of a contribution made by a company to an RCA in respect to benefits to be received by an owner-manager.

We note, however, that it is a question of fact whether an arrangement which the employer is funding is an RCA as defined in subsection 248(1) of the Act or a salary deferral arrangement as defined in the same subsection. Amounts which are salary or wages will retain their identity as such even if paid after retirement. In this respect, please note the comments in paragraph 8 of Interpretation Bulletin IT-337R2 ("Retiring Allowances") that the size of a retiring allowance must be reasonable having regard to, among other things,

"its relationship to the remuneration received for the years of service, and the value of pension and other retirement benefits.... Particularly, a distinction must be made between a retiring allowance and deferred compensation, such as where it is clear that the employee has taken a low salary in return for a generous so-called retiring allowance".

We point out that, in our opinion, the same position applies to supplementary pension benefits.

Thus, it is necessary to determine whether the arrangement is a salary deferral arrangement i.e., an arrangement that creates a right in the employee to receipt of current salary or wages in a later taxation year or years, and one of the main reasons for the creation of the right is to defer the payment of tax.

If it is established that the arrangement is an RCA and its funds are invested in debt of the employer, the employer is subject to an income inclusion in accordance with subsection 56(11) of the Act if the employer has the use or enjoyment of the RCA funds for no consideration or for consideration less than the fair market value of such use or enjoyment. Whether the loan by the RCA is made on terms which result in the employer paying fair market value for the loan is a question of fact and one on which we cannot comment.

Although the foregoing comments are not binding on the Department, we trust they are helpful.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch