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 254(a) applies to the purchase by an RCA trust of annuities providing periodic payments for life & a lump sum for guaranteed portion for the spouse of a deceased employee;
2)whether the employer may loan (i.e. it won't be considered a contribution) the amount needed by the RCA trust to make up the difference between the RCA assets and the price of the annuities (loan to be repaid by the amount of refundable tax the refund of which is triggered by the purchase of the annuities);
3)whether the annuities will be considered subject property of the RCA thereby preventing refund of Part XI.3 tax to custodian after final return filed.
Position:
1) and 2) Yes; 3) No.
Reasons:
1)The spouse has, under the terms of the RCA, a right to the annuities upon the death of her husband (retired employee who had been in receipt of pension payments prior to his death) and a right to lump sum on her death;
2) In these circumstances the loan is not considered to be a contribution since the RCA will enter into the short-term loan for an amount exactly equal to the amount of refundable tax which will be refunded upon the final distribution by the RCA through the purchase of the annuities;
3)the annuities are the property of the spouse and there will be no assets left in the RCA except the right to the refund (and therefore a 207.5(2) election will result in a refundable tax of nil for that year and the RCA can file a return and claim the refund at the end of the year for which the aforementioned election is made).
XXXXXXXXXX 970623
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above-named clients and further to our telephone conversation XXXXXXXXXX.
FACTS
1.The Beneficiary is a resident of Canada who lives at XXXXXXXXXX. The Beneficiary files her tax returns at the XXXXXXXXXX Tax Centre and resides within the area served by the XXXXXXXXXX Taxation Services Office.
2.The RCA is a retirement compensation arrangement and its custodian's address is XXXXXXXXXX. The RCA files its returns at the XXXXXXXXXX Taxation Centre and the Custodian's office is within the area served by the XXXXXXXXXX Taxation Services Office.
3.The Beneficiary's husband, XXXXXXXXXX (the "Employee"), was a senior executive with XXXXXXXXXX (the "Company"), a taxable Canadian corporation.
4.The Company entered into an executive retirement benefit agreement (the "Agreement") with the Employee effective XXXXXXXXXX. A copy of the Agreement was enclosed with your letter.
5.The Agreement provided for periodic pension payments to be made to the Employee for life, subject to a requirement that he not compete with the Company. These payments were intended to supplement the pension payable to him under the Company's registered pension plan.
6.The Employee retired at age XXXXXXXXXX, and commenced to receive a pension under the Agreement. XXXXXXXXXX.
7.The Agreement provides that after the death of the Employee the Company is required to purchase an annuity for the Beneficiary payable for her lifetime. The amount of the annuity is $XXXXXXXXXX per month. The Agreement also provides that if the Beneficiary dies before a specified number of monthly payments are made to her, the Company is required to make a lump sum payment equal to the present value of the remainder of the payments. The lump sum is payable to the beneficiary named by the Employee or, if no person has been named, to the Beneficiary's estate.
8.The Company entered into a trust agreement with the Custodian dated XXXXXXXXXX, pursuant to which a trust fund (the "Fund") was established to partially secure the payment of benefits under the Agreement and under similar agreements with XXXXXXXXXX other employees. A copy of the trust agreement was enclosed with your letter. The Company has made contributions to the Fund.
9.As a result of its acquisition of the pension and institutional trust business of the Custodian, the Agent has become the agent of the Custodian in respect of the Fund. A copy of the document appointing the Agent was enclosed with your letter.
10.Each asset of the Fund is held specifically for the purpose of paying benefits to a particular employee and the employee's beneficiaries. The portion of the Fund held to pay benefits to a particular employee and the employee's beneficiaries has been treated as a retirement compensation arrangement. Thus, the Fund consists of four retirement compensation arrangements, including the RCA. Tax has been paid under Part XI.3 of the Income Tax Act (the "Act") by each of these retirement compensation arrangements.
11.As of XXXXXXXXXX, the RCA's assets consisted of cash and debt obligations amounting to about $XXXXXXXXXX (including accrued interest). Its refundable tax at the end of XXXXXXXXXX was about $XXXXXXXXXX. Approximately $XXXXXXXXXX of this amount will be refunded when the return for XXXXXXXXXX is filed.
12.Since the Employee's death, the monthly pension to which the Beneficiary is entitled has been paid from the RCA.
PROPOSED TRANSACTIONS
13.The Custodian will use the assets of the RCA to purchase XXXXXXXXXX annuities that will be owned by and payable to the Beneficiary. They will be purchased this year (1997). The annuities will be payable for the Beneficiary's lifetime and will provide, in total, for monthly payments equal to the monthly payments to which she is entitled pursuant to the Agreement. In addition, each annuity will provide for a lump sum death benefit, payable if the Beneficiary dies before XXXXXXXXXX, equal to the present value of the additional payments that would have been made under the annuity if she had survived to that date.
14.The annuities are expected to cost about $XXXXXXXXXX. Since the RCA has approximately $XXXXXXXXXX available to purchase the annuities, it will require an additional amount of about $XXXXXXXXXX. The Company will provide the additional funds through a combination of a contribution and an interest-free loan to the RCA. The amount of the contribution and the loan will be determined so that the loan equals the RCA's refundable tax plus the amount of tax withheld on the contribution. The loan will be repayable when the RCA obtains a refund of its Part XI.3 tax. It is expected that the contribution and the loan will equal about $XXXXXXXXXX respectively.
15.The trust agreement will be amended to permit the Custodian to borrow money from the Company.
16.The Company will withhold 50% of the contribution and remit this amount to the Receiver General on account of the RCA's tax under Part. XI.3 of the Act.
17.After the purchase of the annuities, the RCA will hold no assets other than its entitlement to a refund of tax. The RCA will not subsequently acquire any assets other than the amount paid to it as a refund of tax, which will be used to repay the loan from the Company.
18.The Company, the Beneficiary and the Executors of the Employee will enter into an agreement providing for these proposed transactions. The agreement will also provide that it replaces all rights which the Beneficiary has under the Agreement. A draft of the agreement was enclosed with your letter.
19.The Custodian will elect to have subsection 207.5(2) of the Act apply for the RCA's 1997 taxation year.
PURPOSE FOR THE PROPOSED TRANSACTIONS
20.The proposed transactions are intended to secure the payments of the monthly pension to the Beneficiary using the assets that were set aside in the RCA to the maximum extent possible. Annuities are to be purchased to ensure that payments will be made for the lifetime of the Beneficiary. The annuities are to be owned by the Beneficiary since this is a simpler arrangement than having them held by the Custodian of the RCA.
21.To the best of your knowledge and the knowledge of the Beneficiary and the Custodian, none of the issues involved in this ruling request is
(i)in an earlier return of the taxpayer or a related person,
(ii)being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or related person,
(iii)under objection by the taxpayer or a related person, or
(iv)before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.
RULINGS
Provided the above statement of facts and proposed transactions are accurate and constitute a complete disclosure of all the relevant facts and provided the transactions are completed as proposed, we rule as follows:
A.The amount loaned by the Company to the Custodian of the RCA will not be considered a contribution to the RCA for purposes of the Act.
B.By virtue of paragraph 254(a) of the Act no amount will be required to be included in the Beneficiary's income in respect of the purchase by the RCA of the annuities in her name; she will be required to include in her income pursuant to subsection 56(1) of the Act the amount of each annuity payment received.
C.Subsection 153(1) of the Act will not apply to require the Custodian to withhold any amount in respect of the purchase of the annuities.
D.The annuities purchased by the RCA in the name of the Beneficiary will not be considered subject property of the RCA for purposes of Part XI.3 of the Act.
The above advance income tax rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, and are binding upon Revenue Canada provided the proposed transactions described in 13 through 18 above are completed by XXXXXXXXXX.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch
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