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 assets pledged is a contribution to a RCA where a letter of credit is secured by a charge on the assets?
2.Whether 207.5(2) applies where all the property of a RCA have been distributed?
Position TAKEN:
1.Question of facts to be determined on a case-by-case basis.
Could be a contribution to a RCA.
2. Yes
Reasons FOR POSITION TAKEN:
1. 5-932248, 7-931974, 5-931303, 5-931891.
2. RCA guide, page 9.
5-950295
XXXXXXXXXX R. Gagnon
Attention: XXXXXXXXXX
March 31, 1995
Dear Sirs:
Re: Retirement Compensation Arrangements
This is in reply to your letter of January 26, 1995 wherein you requested a technical interpretation concerning the application of the rules for retirement compensation arrangements ("RCA") to letters of credit.
It would appear that the subject matter of your letter relates to transactions that have either taken place or are proposed rather than to a request for the Department's interpretation of a specific provision of the Income Tax Act ("Act"). If you wish the Department's views with respect to a completed transaction, you should write to your client's District Office. Alternatively, if you are dealing with a proposed transaction, you may wish to request an advance income tax ruling in accordance with the requirements set forth in the Information Circular 70-6R2. While we are unable to comment on the income tax consequences concerning the specific facts described in your letter, the following general comments may be of assistance to you.
In order to fund a RCA, an employer may establish a trust for the benefit of employees and make contributions equal to twice the annual fee required by a financial institution for issuing a letter of credit (to secure the obligations to the employees under the plan) to the trust. The trustee remits one half of the contributions as Part XI.3 Tax and uses the remaining portion of the contribution to pay the required fee to the financial institution. Where the arrangement provides that the employer pays on behalf of the trustee the fees to the financial institution and the Part XI.3 Tax, and that the payments are considered to be contributions to the trust, the Department treats the payments as contributions to the RCA.
Where a trust which is a RCA obtains a letter of credit and, in addition to the fee charged by the bank to the trust, the letter of credit is secured by a charge on certain assets of the employer, the fair market value ("FMV") of the assets pledged could be a contribution to a RCA under the arrangement. The issue is a question of facts and must be determined on a case-by-case basis. Where under an arrangement the securing of assets is a contribution to a RCA, the amount of such contribution would be the lesser of the FMV of the assets and the face amount of the letter of credit. The tax payable under Part XI.3 of the Act would be equal to the amount of such contribution and would also be considered a contribution for the purposes of the RCA rules. Accordingly, the securing of assets which is a contribution would create contributions deductible under paragraph 20(1)(r) of the Act equal to twice the lesser amount determined above.
Where all the property of a RCA has been distributed, the custodian may choose to apply subsection 207.5(2) of the Act. In such a situation, subsection 207.5(2) of the Act deems the refundable tax on hand to be nil and any refund due may be claimed by the custodian.
Any amount received by the employer from a custodian as a refund of refundable tax is included in the employer's income under paragraph 12(1)(n.3) of the Act.
Where, under an arrangement, the securing of assets for a letter of credit can be considered a contribution to a RCA and the letter of credit is subsequently cancelled, it is our view that an amount would be included in the income of the employer under paragraph 12(1)(n.3) of the Act. The amount included in the income would depend upon the circumstances, without exceeding the FMV of the assets.
The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretation Directorate
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