13 January 1995 External T.I. 9430035 - EBP DEFERRED PAYOUT OPTIONS

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:How long can EBP payouts be deferred?

Position TAKEN:Very general routine reply provided.

Reasons FOR POSITION:Relates to a factual situation. Only routine information should be provided.

XXXXXXXXXX 5-943003

Attention: XXXXXXXXXX

January 13, 1995

Dear Sirs:

This is in reply to your Facsimile of November 22, 1994, concerning the use of annuities to fund payments out of an employee benefit plan (an "EBP").

Written confirmation of the tax implications of proposed transactions can only be provided by this Directorate where the transactions are the subject matter of an advance ruling request submitted in the manner set out in the attached Information Circular 70-6R2. Accordingly, at this time we can only provide you with the following general information which you may find to be of assistance.

With respect to your first two questions the Department's Interpretation Bulletin IT502, discusses the tax consequences to a member of an EBP in respect of the payment of amounts out of an EBP. Paragraph 11 states as follows:

"11.Where the terms of an employee benefit plan provide that an employee entitled to benefits thereunder may elect to defer the receipt of a lump-sum amount payable on death, retirement or other termination of employment, it is the Department's view that the amount so deferred would normally be taxed in the year of actual receipt provided the election to defer is made prior to the termination of employment. Where, for instance, the plan specifies that an amount becomes payable 30 days after a particular event, the election must be made prior to the 30th day after such event. If, however, the plan specifies that the amount becomes payable on the happening of a particular event and the amount is to be paid within 30 days thereafter, the election must be made prior to the particular event."

Accordingly a member of an EBP may elect to defer an amount out of an EBP if the plan provides for the deferral and the election is made on a timely basis as described. Furthermore, what may occur after a member has made such an election will also depend on the specific terms of the particular plan. However, because an EBP represents a deferral of income for the beneficiaries services, our approval for payments to be made after termination of employment has not been extended to any series of payments over a time period greater the beneficiary's life unless such payments are scheduled on the basis of a joint survivor life annuity with or without a guaranteed term not in excess of 15 years. It therefore follows that we would not approve a plan that provides a 15 year deferral followed by the acquisition of an annuity.

With respect to your third question relating to the termination of an EBP we refer you to paragraph 10 of Interpretation Bulletin IT500 which reads as follows:

"10.The Department considers an amount to have been received by an EBP beneficiary out of the plan upon the earlier of the date upon which payment is made and the date upon which the EBP beneficiary has constructively received a payment. Constructive receipt is considered to apply in situations where an amount is credited to an EBP beneficiary's debt or account, set apart for the EBP beneficiary or otherwise made available to the EBP beneficiary without being subject to any restriction concerning its use. Consideration will be given to the application of subsection 56(2) (indirect payments) where payments are made to persons other than the employee or former employee while living."

In application to your situation, if an EBP is terminated and payments are made to the beneficiaries, the amounts paid will be taxable. Furthermore, if amounts are paid to a third party for the benefit of the member, for example to acquire an annuity in the members name the amounts may also be taxable.

The above comments are based on our understanding of the law as it applies in general. However, they may or may not apply to the circumstances of a particular case. The comments do not form an advance income tax ruling and they are not binding on the Department.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate