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.
APFF - 1995
Question 18
Letter of credit and retirement compensation arrangement
An employer lays off one of its employees with a retiring allowance payable in two equal annual instalments. To guarantee the payment of the second instalment, the employer gives the former employee’s union a letter of credit. The letter of credit is not negotiable and can only be used if the employer fails to pay the second instalment of the retiring allowance at a given date.
Is Revenue Canada of the view that in giving a letter of credit to the union constitutes the establishment of a retirement compensation arrangement? If so, what is the amount of the employer’s contribution? Can a waiver of source deductions be obtained on the basis of subsection 153(1.1) of the Act in such cases?
Answer by the Department of Revenue
The Department is of the view that the arrangement described above constitutes a retirement compensation arrangement. The fair market value of the letter of credit given to the union will be considered an employer contribution to the retirement compensation arrangement subject to the 50% Part XI.3 refundable tax.
The fair market value of the letter of credit, which is a question of fact, will depend on factors such as the date payable, the terms and conditions of payment, the employer’s credit, and the intentions of the parties at the time of the transaction. The fair market value is not necessarily the face value of the letter of credit.
We are of the view that subsection 153(1.1) of the Act would not apply in this situation because there would not be a refund of the Part XI.3 tax at the end of the tax year in which the trustee of the retirement compensation agreement received the letter of credit.
If the letter of credit is not used, the trustee of the retirement compensation agreement may choose to apply the provisions of subsection 207.5(2) of the Act to deem that the refundable tax on hand is nil, in order to obtain a rebate of the tax.
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© Her Majesty the Queen in Right of Canada, 1995
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