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:
Whether or not a supplemental pension plan secured by a letter of credit would be an RCA
Position TAKEN:
Yes, explained the provisions of RCA and contributions to an RCA with respect to a letter of credit
Reasons FOR POSITION TAKEN:
Established position
June 28, 1995
Headquarters Headquarters
DO & TC Support Services Section Mary Pat Baldwin
Source Deductions Division (613) 957-8953
J. Ivey
Section Chief
Attention: D. Chavez 7-950849
Non-Funded Supplemental Pension Plans
This is in reply to memorandum of March 27, 1995 requesting information concerning a case where an employer has a supplemental pension agreement with certain of their senior executives and secures its liabilities through a letter of credit. In particular you would like to know whether or not such a financial instrument would constitute making a contribution for the purposes of the definition of Retirement Compensation Arrangement ("RCA").
The Department has publicly stated it's position with respect to the use of a letter of credit ("LOC") and RCAs at the 1988 and 1992 CTF Round Tables (copies are attached).
It is the Department's position that a retirement arrangement funded or secured through the use of an LOC is an RCA. There are two ways of using an LOC to fund an RCA. First, an employer may directly acquire an LOC from a financial institution for the benefit of its employees. When this occurs, it will have established an RCA and contributed the LOC to it. The value of the contribution is the value of the LOC at that time, which is a question of fact and the Department has not expressed any opinion on this issue.
The other way of funding an RCA through an LOC is to first create an RCA trust and then the employer makes a contribution to the trust sufficient to cover the cost of acquiring the LOC. The trustee of the RCA may then use the funds to purchase the LOC.
In either of the above cases, a financial institution will usually require the employer to back up the LOC with some form of security. Often this simply takes the form of a charge against the employer's general line of credit with the institution. However, in other cases, a charge may be placed on specific assets of the employer such as general deposit funds.
The Department's concern has been whether or not these security arrangements could also be considered as funding for the RCA. We have however generally stated that if specific assets are not specifically set aside for the RCA and can be used for other purposes or to satisfy other creditors, they would likely not be considered as separate contributions to the RCA.
Where a trust governed by an RCA obtains an LOC and, in addition to the fee charged by the bank to the trust, the employer must pledge assets, the amount of contributions under the RCA, would, in our view, be equal to the lesser of the total of fair market values of both the LOC and the pledged assets and the face amount of the LOC.
In addition to the above, a contractual obligation by the company to prepay the amount of the LOC to the bank on demand would not constitute a contribution to the RCA in and of itself; however, any payment to or under the RCA by the bank under the terms of the LOC to the trust 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.
We are returning the documents that were attached to your letter.
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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