30 November 1996 Ruling 9709593 - UNFUNDED SUPPLEMENTARY PENSION PLAN

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 an unfunded supplemental pension for an employee is an 1) SDA, 2) RCA, or 3) 6(3)(e) payment in consideration of covenants not to work for competitors.

Position:

1) - 3) No.

Reasons:

1) Facts (e.g., amount of current salary and bonuses v. amount of post-termination payments, length of time required to have vested rights to payments) support that the periodic payments to be made upon retirement at age XXXXXXXXXX, or reduced periodic payments to be made upon early retirement at option of employee after age XXXXXXXXXX or upon termination by employer without cause or for disability before age XXXXXXXXXX are for purpose of providing benefits after retirement or termination and not an amount of salary or wages to which employee has current right;

2) Since not currently funded, cannot be an RCA;

3) No specific amount or amounts are explicitly linked to the covenant not to compete (see Richstone under Jurisprudence below). Although employee covenants not to compete while employed or for two years after termination, this condition is relevant not only to the right to pension payments but also to continued employment; consideration for such covenant is tied integrally to all terms of employment and not solely to the periodic payments to be received after retirement or termination. Primary or substantial purpose of payments cannot be said to satisfy words in 6(3)(e).

XXXXXXXXXX							970959
XXXXXXXXXX

XXXXXXXXXX, 1997

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling
XXXXXXXXXX

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

FACTS

1.The Employee resides at XXXXXXXXXX, and is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.

2.The Employer operates a XXXXXXXXXX in the City of XXXXXXXXXX (the "City").

3.The Employee became employed by the Employer in XXXXXXXXXX and currently acts as the XXXXXXXXXX. For the past XXXXXXXXXX years the Employer has provided the Employee with a car (latest monthly lease payments are $XXXXXXXXXX) and his annual salary and bonus (and first four months salary and bonus of XXXXXXXXXX) have been as follows:

		Year		Salary	Bonus

XXXXXXXXXX

In a letter dated XXXXXXXXXX, the Employer set out the terms of employment to which the Employee and Employer have agreed, which terms include a salary of $XXXXXXXXXX per annum for each calendar year to be increased each year commencing in XXXXXXXXXX by an amount equal to XXXXXXXXXX% of the salary in effect for the immediately preceding calendar year. The yearly salary will also be increased by the increase in the Consumer Price Index for the City up to a maximum of XXXXXXXXXX% and in addition the Employee is entitled to a yearly bonus of $XXXXXXXXXX payable from XXXXXXXXXX, inclusive, bonuses thereafter to be negotiated.

4.The Employee is a member of the Employer's Employees' Pension Plan, a registered pension plan, and based on the Employee's years of service and average earnings as calculated under the Employees' Pension Plan it is expected that he will accrue the maximum pension benefit permitted for defined benefit pension plans under the Income Tax Act (the "Act").

PROPOSED TRANSACTIONS

5.In addition to the pension payments which will be due under the registered pension plan, the Employer proposes to pay a supplemental pension of up to $XXXXXXXXXX per calendar year (subject to adjustment following the Employee's retirement in accordance with the Consumer Price Index to a maximum of XXXXXXXXXX% per year) to the Employee upon his retirement which is scheduled to occur on XXXXXXXXXX. The terms of the Plan are set out in the letter of XXXXXXXXXX, referred to in 3 above, and as confirmed in our telephone conversation of XXXXXXXXXX are to implemented only upon receipt by the Employee of a favourable advance income tax ruling. The relevant terms of the Plan are as follows:

(a)Benefits will accrue under the Plan at a rate of $XXXXXXXXXX per year from XXXXXXXXXX through XXXXXXXXXX, for each calendar year during which the Employee is XXXXXXXXXX or holds such other position as the Employer may require. As stated in your letter of XXXXXXXXXX, the Plan will not be funded, and as confirmed in our telephone conversation XXXXXXXXXX, no property has been or will be set aside by the Employer to fund the benefits under the Plan.

(b)Amounts will not be payable under the Plan 1) if the Employee's employment with the Employer is terminated for cause or 2) if the Employee engages, whether before or after retirement, in any activity which may be regarded as being competitive with the Employer's business in a competitive medium widely accessible to the public in the City market, or 3) after the Employee's death.

(c)If the employee dies before XXXXXXXXXX, no benefit is payable under the Plan. If the Employee terminates employment before XXXXXXXXXX, or the Employer terminates the Employee's employment before XXXXXXXXXX, because of the Employee's physical or mental disability or without cause, the benefits accrued under the Plan to that date will be payable monthly in arrears to the Employee commencing XXXXXXXXXX. No benefits will accrue under the Plan after the date employment is terminated and the amount payable annually will be as follows:

TERMINATION BY EMPLOYEE

Date of termination Annual supplemental pension

XXXXXXXXXX

TERMINATION BY EMPLOYER FOR DISABILITY OR WITHOUT CAUSE

Timing of Termination Supplemental Pension Entitlement

XXXXXXXXXX

"Accrued Entitlement" means the amount accrued (based on $XXXXXXXXXX per year) for each calendar year of employment completed (commencing with the XXXXXXXXXX calendar year) prior to the date of termination.

PURPOSE OF PROPOSED TRANSACTION

6.The Employer's objective in proposing the supplemental pension payments is to retain the Employee's services until retirement at age XXXXXXXXXX and to ensure that the Employee's marquee services will not be retained by a competitor prior to and after the proposed retirement date. The Employee wants to ensure that if he is going to forego other employment opportunities, the Employer is still liable to him if it were to terminate him prior to the entitlement date. Also the Plan must be significant for the Employee to forego post-retirement endeavours in his field which are widely accessible to the City public.

OTHER INFORMATION

7.To the best of the Employee's knowledge none of the issues involved in this ruling request is being considered by a taxation services office or a taxation centre in connection with a tax return already filed nor are any of the issues under objection or appeal.

RULINGS

Provided the above statement of facts and proposed transaction are accurate and constitute a complete disclosure of all the relevant facts and provided the transaction is completed as proposed, we rule as follows:

A.The Plan will not constitute a "salary deferral arrangement" as that term is defined in subsection 248(1) of the Act.

B.The Plan will not constitute a "retirement compensation arrangement" as that term is defined in subsection 248(1) of the Act.

C.Each payment made by the Employer to the Employee under the Plan will be included in the income of the Employee in the year it is received as a superannuation or pension benefit pursuant to subparagraph 56(1)(a)(i) of the Act.

D.No amount will be included in the income of the Employee under subsection 5(1) or paragraph 6(1)(a) or subparagraph 56(1)(a)(i) of the Act as a result of, in and of itself, the Employee's participation in the Plan, other than as provided in Ruling C.

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 Plan is established by XXXXXXXXXX.

Yours truly,

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