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.
Dear XXX
We refer to your letter of April 9, 1986, in which you requested our views on the deductibility of an employer's contribution to an internal reserve with respect to a disability or other benefit type plan wherein an employer self insures future benefits from the plan that will be payable to its employees.
Opinions
In our view, contributions set aside to establish an internal reserve for the purposes mentioned by you would not be deductible for income tax purposes since such contributions would constitute amounts transferred or credited to a reserve, contingent account or sinking fund for the purposes of paragraph 18(1)(e) of the Income Tax Act (the Act). The provisions of subsection 245(1) of the Act would likely also apply to such an internal reserve.
The Department's views on the application of paragraph 18(1)(e) of the Act are set out in IT-215R. You might also wish to refer to the following tax cases that comment on the type of situation to which either paragraph 18(1)(e) or subsection 245(1) could apply:
Day & Ross Ltd. v. MNR - 76 DTC 6433 FCTD
Don Fell Ltd. v. The Queen - 81 DTC 5282 FCTD
Harlequin Enterprises Ltd. v. The Queen - 77 DTC 5164 FCA
In order for contributions to the type of plan envisaged by you to be deductible, they must be paid into a trusteed plan or to an insurance company. IT-85R and IT-339R discuss in a general way the tax consequences of the arrangements that could be entered into between an employer and a trusteed plan or insurance company.
There is no absolute test of reasonableness of a contribution level. his is a question of fact that would vary with each given situation. However, we believe that the level of funding should be determined in accordance with actuarial principles, and based on a determinable liability and not merely a general provision against contingencies. Moreover, the payments made by the employer to fund the plan should be irrevocable.
We hope that the above comments will be of some assistance to you.
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© Her Majesty the Queen in Right of Canada, 1986
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© Sa Majesté la Reine du Chef du Canada, 1986
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