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.Is the amount something other than a pension due to short work history?
2Is the amount something other than a pension because of the non-competition clause?
3.Will shareholder's guarantee result in funding of the plan.
Position:
1. No.
2. No.
3. No.
Reasons:
1.The period is sufficient. 12 years of service will allow a pension of 30% of salary. This compares to a normal pension of 70% after 35 years.
2.While a non-competition clause can cause some payments to be income from employment, we have given this ruling in a number of cases similar to this. See E970959, E940928, E921464, E912920 and E30355. It is of particular note that no consideration is specifically being paid in respect of the Executive's acceptance of the covenant. The covenant provides that the pension benefits are forfeited if it's terms are breached.
In comparison to the facts in file E970959, in this case no written agreement exists to tie the covenant to the Executive's continued employment. A reasonable argument could be made that it is part of the normal conditions of employment for the employee.
3.The guarantee constitutes nothing more than a statement that the parent shareholder may assume the obligations of the employer. A simple guarantee of the shareholder is insufficient to cause funding. See E90060.
XXXXXXXXXX 971110
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, in respect of an advance income tax ruling on behalf of the above noted persons.
FACTS
In this letter:
"Company" means XXXXXXXXXX which has Revenue Canada Account number XXXXXXXXXX, uses the XXXXXXXXXX Tax Services Office and files returns with the XXXXXXXXXX Taxation Centre. The company is a wholly-owned subsidiary of XXXXXXXXXX corporation.
"Executive" means XXXXXXXXXX who has the social insurance number XXXXXXXXXX.
The Company does not currently sponsor a pension plan for its employees that is a registered pension plan within the meaning of the Act.
The Executive has been employed by the Company since XXXXXXXXXX. The Employee has received the following annual salary:
Year Annual Salary
XXXXXXXXXX
PROPOSED TRANSACTIONS
The Company proposes to implement a non-funded supplementary retirement arrangement (an "SRA") for the Executive.
The SRA will have the following attributes:
The pension benefit payable under the SRA will be an annual amount equal to 30% of the Executive's average annual salary (including all cash bonuses and incentives) during the 36 month period immediately preceding the date on which he retires from the Company (the "Retirement Date").
The SRA benefit will be payable on a monthly basis for 15 years subsequent to the Executive's Retirement Date.
The obligation of the Company to pay the SRA benefits will be a contractual commitment. The Company's contractual commitment under the SRA will be guaranteed by the U.S. parent. The SRA will not be funded or otherwise secured in any way and in any event, no contributions will be made by the Company or its U.S. parent to a segregated account. The SRA benefits will be paid after the Retirement Date from the general revenues and reserves of the Company.
The SRA benefits will fully vest in the Executive on the attainment of 12 years of continuous full-time service with the Company starting from XXXXXXXXXX, including 2 years of continuous full-time service holding the office of XXXXXXXXXX. Except for death benefits described in 4.e. below, no SRA benefits will be payable to the Executive if the Executive's employment with the Company is terminated for any reason prior to the date on which the Executive becomes fully vested.
In the event the Executive dies after 12 years of continuous full-time service with the Company that includes 2 years of continuous service as an XXXXXXXXXX and while still employed by the Company, 75% of the SRA benefit will be payable to the spouse of the Executive in monthly instalments for 15 years subsequent to the death of the Executive or until the death of the spouse (whichever is earlier) as if the Executive had been fully vested and the Retirement Date was the day immediately preceding the Executive's date of death.
In the event the Executive dies after the Retirement Date but prior to receiving all SRA benefits, the spouse of the Executive will be entitled to receive 75% of the amount the Executive would have received during the balance of the period or until the spouse's death (whichever is earlier).
Notwithstanding the vesting provision described in 4d., benefits payable to the Executive under the SRA will be forfeited in any of the following circumstances:
any transfer pledge, attachment or assignment by the Executive of the right to receive the SRA benefits;
involvement of the Executive in a business or activity which competes with the Company, within 18 months after terminating employment with the Company or within 18 months after the Retirement Date;
any wilful and deliberate, or grossly negligent, act or omission by the Executive which is injurious to the Company; or
if the Executive's employment with the Company is terminated for cause.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of establishing the SRA is to provide retirement benefits to the Executive.
More particularly, the Company wishes to provide an incentive for the key Executive to remain employed with the Company. This purpose will be accomplished by setting up the SRA as a simple, non-registered and unfunded pension plan for the Executive. Under the SRA, the Executive will receive periodic pension payments after the date he retires from the Company, but only if the Executive (i) attains at least 12 years of continuous full-time service that includes 2 years of continuous service as an XXXXXXXXXX of the Company; and (ii) he refrains from being engaged in competition with the Company for one and one-half years following retirement. A supplementary purpose is to pay pension benefits to the spouse of the Executive, if the Executive dies after the said 12 year and 2 year requirements are both met.
None of the issues involved in this ruling request is, to the best of your knowledge, being considered by a Tax Service Office or Taxation Centre in connection with any tax return already filed by the Company, the Executive or a related person and none of the issues involved is the subject of any Notice of Objection or is under appeal.
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.The SRA will not constitute a salary deferral arrangement as that term is defined in subsection 248(1) of the Act.
B.The SRA will not constitute a retirement compensation arrangement as that term is defined in subsection 248(1) of the Act.
C.All payments made under the SRA by the Company to the Executive and, after the Executive's death, to the spouse of the Executive, will be included in the income of the recipient 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 Executive under subsection 5(1) of the Act or paragraph 6(1)(a) of the Act as a result of, in and by itself, the Executive's participation in the SRA other than indicated in ruling C.
The above rulings are given subject to the limitations and qualifications set forth in the Department's Information Circular 70-6R3 dated December 30, 1996, and are binding upon Revenue Canada provided the SRA is established by XXXXXXXXXX.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1996
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© Sa Majesté la Reine du Chef du Canada, 1996
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