30 November 1996 Ruling 9706673 - RCA LETTER OF CREDIT

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:

Use of letters of credit (LOC) to fund RCA trusts

Position:

Only actual amount contributed to the RCA and not an amount in respect of the LOC will be treated as contibutions to the RCA where the RCA is not secured except as a general floating charge on the employers line of credit.

Reasons:

The position has been estatablished in previous rulings that the floating charge on the line of credit will not result in additional contributions.

XXXXXXXXXX							970667
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letters of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted corporation.

Terms

In this letter:

"Employer" means XXXXXXXXXX

"Plan A" means the Supplementary Executive Retirement Plan for certain eligible executives of the Employer and its operating companies

"Plan B" means the Supplementary Pension Plan for eligible senior managers of the Employer and its operating companies

"Eligible Employees" means employees of the Employer and its operating companies eligible to participate in the above plans (the "Plans")

"Credit Agreement" means the agreement dated XXXXXXXXXX, under which a syndicate of lenders (the "Bank") made available to the Employer, credit facilities for the purpose of, among other things, financing its day to day operations, working capital requirements, capital expenditures, and other general corporate purposes. The conditions of the facility provide that the Employer may utilize the facility by requesting from the Bank, the making of loans, or the issue of bankers' acceptances or letters of credit. The Credit Agreement was attached to your request.

Facts

The Employer is a corporation organized under the laws of Canada. Tax returns are filed at the XXXXXXXXXX taxation centre.

The Employer set up the Plans with effect from XXXXXXXXXX.

The purpose of the Plans is to provide certain employees of the Employer and its operating companies with additional pension benefits at retirement in excess of those that can be provided under the provisions of the registered pension plans of the Employer in effect in both Canada and the United States of America.

Under the Plans, no funding is required from the Employer but the Employer undertook to secure the payments of the additional pension benefits through letters of credit issued by a financial institution. On XXXXXXXXXX the total present value of the additional pension benefits liability under the Plans was $XXXXXXXXXX as actuarially calculated.

Any letter of credit issued by the Bank under the Credit Agreement will constitute a borrowing by the Employer in an amount equal to the amount of the letter of credit being issued and will reduce for as long as such borrowing remains outstanding, the amount of the credit remaining available to the Employer under the Credit Agreement by an amount equal to the amount of the borrowing.

Pursuant to the Credit Agreement, the debts and liabilities of the Employer resulting from any utilization of the credit facility are secured in favour of the Bank by the following:

a first ranking on its account receivable and property in stock, present and future, by way of a conventional hypothec for an amount of $XXXXXXXXXX from the Employer in favour of the Bank; and

a first ranking assignment of inventory under section 427 of The Bank Act from the Employer in favour of the Bank.

The above security is not enforceable unless the Employer is in default under the specific terms of the relevant Hypothec or assignment. That is, until default, the security given by the Employer in respect of its general operating line of credit is in the nature of a floating charge.

Under the Credit Agreement, the conventional hypothec and the assignment of inventory, the Employer will be in default if it fails to pay or perform any of its present and future debts, obligations and liabilities to the Bank, fails to perform or observe the covenants and warranties contained in the Credit Agreement, makes an assignment in bankruptcy or has, in the sole opinion of the Bank, undergone a material adverse change in its business or operations.

Proposed Transactions

The employer proposes to establish a trust (the "Trust") in accordance with an agreement (the "Trust Agreement") to secure benefits under the Plans. It is intended the arrangement will constitute a Retirement Compensation Arrangement (RCA).

The trustee (the "Trustee") of the Trust will secure the benefits under the Plans with a letter of credit (the "LOC") issued by the Bank. The LOC will be in favour of the Trustee and in an amount equal to the present value of the additional pension benefits liability as actuarially calculated. The trustee will be the beneficiary of the LOC.

Pursuant to the terms of the Trust Agreement, the Employer will make a contribution to the Trust in an amount equal to twice the fee payable to the Bank by the Trustee for the issuance of the LOC. The face amount of the LOC will be actuarially determined immediately prior to the contribution being made. Therefore, the fee payable to the Bank, which is a percentage of the face amount of the LOC will be determined at the time.

Pursuant to the terms of the Trust Agreement, the Employer will make additional contributions to the Trust, with the after-tax amount equal to the amount required to pay any applicable renewal fees in respect of the LOC.

Pursuant to the terms of the Trust Agreement, the Employer may make additional contribution to the Trust ("Special Contributions") to the extent that the amount of the contribution, the refundable tax and the face value of the LOC will be sufficient in the opinion of the actuary appointed under the trust, to satisfy the Employers obligations to Eligible Employees, as described above.

The employer will withhold amounts pursuant to paragraph 153(1)(p) of the Act and subsections 103(7) and 108(1) of the Income Tax Regulations from all contributions made by the employer and remit them to the Receiver General.

Except for the Special Contributions the Trustee will use the net funds received from the Employer to obtain the LOC from the Bank.

Pursuant to the terms of the Trust Agreement, the Trustee will only be allowed to draw upon the LOC if:

the Employer fails to make a payment to an Eligible Employee under the Plans;

the Employer fails to provide the Trustee with any contributions required in order for the Trustee to pay any renewal fees in respect of the LOC (subject to a 10 day grace period within which the Employer can rectify the situation);

the Employer fails to obtain a renewal of the LOC or has not arranged for the issuance of a substitute letter of credit on or prior to the tenth day before the expiry of the LOC; or

the Employer fails to pay the Trustee the compensation agreed upon from time to time for the trustee's services as and when due (subject to a 10 day grace period within which the Employer can rectify the situation).

Purpose of the Proposed Transactions

The Employer intends to pay the Eligible Employees additional pension benefits out of general revenues. The letter of credit is intended to secure the Employer's obligation. It is not intended to fund it.

The purpose of establishing the Trust and securing the pension obligations through the irrevocable LOC held by the Trust is to enable the Employer to honour its obligations under the Plans and to provide Eligible Employees with additional pension benefits with the maximum level of security but with the minimum level of current funding possible.

Additional Information

To the best of your knowledge, the issues involved in this ruling are not being considered by a Tax Services Office or Taxation Centre in connection with any tax return already filed and none of the issues is under objection.

Rulings

Provided the above statements of facts and proposed transactions are accurate and constitute a complete disclosure of all the relevant facts and proposed transactions, we rule as follows:

A.For the purposes of 207.7(1) of the Income Tax Act (the "Act") and the definition of "refundable tax" under subsection 207.5(1) of the Act and provided no amounts other than those described above are paid to the trustee by or on behalf of the Employer, the Employer's contributions to the RCA will be:

i. the cash paid to the Trustee by the Employer as specified in paragraphs 12, 13 and 14 above;

ii. the amount remitted to the Receiver General by the Employer pursuant to paragraph 153(1)(p) of the Act and subsections 103(7) and 108(1) of the Income Tax Regulations; and

iii. any amount received by the Trustee under the terms of the LOC should the trustee draw on the LOC for any reason; and

iv. any amounts remitted to the receiver general as a result of a draw on the LOC;

B.Contributions described in A above, made by or on behalf of the Employer and in respect of the employees or former employees of the Employer will be deductible by the Employer to the extent permitted by paragraph 20(1)(r) of the Act for the taxation year in which the contributions are made; and

C.No Eligible Employees will be required to include any amount in income under paragraph 56(1)(x) of the Act solely by virtue of the fact they are beneficiaries under the plan. Pursuant to paragraph 56(1)(x) of the Act, employees will be required to include any payments received out of the Trust in income.

These rulings are provided subject to the general limitations and qualifications set out in the Department's Information Circular 70-6R3 dated December 30 1996, and are binding provided the proposed transactions are entered into before XXXXXXXXXX.

Yours truly,

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