1 April 1997 External T.I. 9705065 - RCA LETTER OF CREDIT AND RCA TAX

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) can accumulating refundable tax be refunded where letter of credit expires and is renewed on a periodic basis;

2) where letter of credit is drawn upon and bank pays amount to RCA trust and then RCA trust distributes full amount to beneficiary, two amounts of withholding are due although refundable tax to be refunded would off-set part of tax due - is waiver or postponement of payment possible.

Position:

1) no;

2) no waiver or postponement under Act - referred to Trust Accounts Division.

Reasons:

1) Expiry of letter of credit not a "distribution" (also not a "disposition" - E9303045);

2) Withholding is due upon contribution in and distribution out and no mechanism in Act to waive liability for withholding on basis that refund of tax will be paid in future. Any administrative position or response is the responsibility of Trust Accounts Division.

XXXXXXXXXX                                   		970506

Attention: XXXXXXXXXX

April 1, 1997

Re: Letter of Credit Held in Retirement Compensation Arrangement ("RCA")

This is in reply to your letter of February 5, 1997, which has been forwarded to us for reply by the Winnipeg Taxation Centre. You ask for the Department's comments concerning two problems you have identified with respect to the above-noted matter.

Accumulating Refundable Tax

Situation: The position of the Department with respect to an employer's contribution to an RCA trust which is used by the RCA trust to acquire a letter of credit is described in our Answer to Question 48 of the 1992 Canadian Tax Foundation Conference. We confirmed that the amount of the contribution is equal to the cash payment to the trustee plus the 50% refundable tax remitted to Revenue Canada. To explain, the total amount of the employer's contribution which is deductible under paragraph 20(1)(r) of the Income Tax Act (the "Act") includes the amount remitted to the Receiver General by the employer by reason of paragraph 153(1)(p) of the Act and subsection 103(7) of the Income Tax Regulations.

Problem: The problem you identify in this situation is that the letter of credit expires and a new contribution to renew the letter of credit is made by the employer to the RCA trust which causes a build-up of the refundable tax even though there is no additional property acquired by the trust but merely a substitution or extension of the same guarantee. You ask whether the RCA trust can claim a refund of the refundable tax on a periodic basis, perhaps every five years.

Comment: Since there is no "distribution" under the RCA of an amount at the time the letter of credit expires, a reduction in refundable tax from one year-end to the next which would trigger a refund in accordance with subsection 207.7(2) will not occur. It is our view that if the retirement income is secured by way of a letter of credit held by an RCA trust, there is no mechanism in the Act to prevent the build-up of refundable tax. At the time the RCA trust no longer holds a letter of credit and the RCA trust is wound-up, the refundable tax will be remitted to the custodian following the filing of the last T3-RCA tax return.

Withholding Tax on Contributions and Distributions

Situation: It is the Department's position, as you note, that where the RCA trust calls upon the letter of credit and the bank pays the amount to the RCA trust, the payment is considered a contribution by the employer. As we previously advised in our letter to you of September 14, 1994 (E9418895) where there is no compliance with the withholding provisions of paragraph 153(1)(p) of the Act, the employer is liable to pay an amount equal to the amount contributed to the RCA pursuant to subsection 227(8.2) of the Act. An assessment for this amount may be raised under subsection 227(10) of the Act.

When the RCA trust distributes the same amount to the beneficiary the custodian is required to withhold by virtue of paragraph 153(1)(q) of the Act. The distribution of this amount and the wind-up of the RCA trust will result in an amount of refundable tax due to the RCA custodian which will be received after the T3-RCA tax return is filed and processed by the Department, but no earlier than the year following the year in which the final distribution is made.

Problem: You point out that in this situation there will be two remittances required to be made to Revenue Canada and that both could be due at the same time, i.e. on the 15th of the month following the call by the RCA trust on the letter of credit and the distribution by the RCA trust. However, there would only be funds available inside the RCA trust to make one of these remittances since the balance is required to fund the benefits promised to the employee and the refund of refundable tax would not have been processed by Revenue Canada and paid to the custodian. You ask whether Revenue Canada would be willing to waive the withholding tax payable by the employer on the payment by the bank of the letter of credit call to the RCA trust so long as the RCA trust is wound-up within a reasonable period of time. Alternatively, you ask that the withholding tax on the distribution out of the RCA be waived and that the Department recover the amount of tax (without arrears of interest or penalties) from the refundable tax account upon assessment of the final T3-RCA tax return.

Comment: As this involves the administration of the withholding requirements, we are referring your query to the Trust Accounts Division of the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c. Mr. Jim Ivey, Section Chief

Policy & Technical Services Section
Trust Accounts Division

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