30 November 1996 Ruling 9718063 - RCA PURCHASE OF ANNUITIES

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 annuities purchased with RCA property are covered by paragraph 254(a) so no immediate tax consequences to employee;
2) whether loan by employer to RCA to enable purchase of annuities pending receipt of refundable tax on filing of terminal return is a contribution;

3) whether an election under 207.5(2) is available after annuities purchased in employee's name and all assets distributed except right to refund.

4) whether GAAR applies.

Position:

1) yes;
2) no;
3) yes;

4) no.

Reasons: In the circumstances,

1)purchase of annuities fulfils conditions in 254(a);
2) loan is bona fide and not a contribution subject to refundable tax;
3) election is available to trigger return of remaining refundable tax;

4)although there is a tax benefit in the application of 254(a) to the purchase of the annuities and to the triggering of the refundable tax at that time, it is clearly within the wording of 254(a) that this may occur, the RCA has been in existence for some time, and the purchase of annuities at the time of retirement to provide the benefits has non-tax purposes of reducing the administrative burden on the employer for the duration of the pension and provides more security to the employee.

XXXXXXXXXX							971806
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX
Retirement Compensation Arrangement

This is in reply to your letter of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above-named client, and further to our telephone conversation XXXXXXXXXX.

FACTS

1.The Employer is incorporated under the laws of XXXXXXXXXX with its head office in XXXXXXXXXX. It's mailing address is XXXXXXXXXX and its tax services office and taxation centre are, respectively, the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.

2.XXXXXXXXXX (the "Employee") is the President of the Employer and is a resident of Canada for the purposes of the Income Tax Act (the "Act"). The Employee is not related to the Employer. The Employee's social insurance number is XXXXXXXXXX.

3.The Employee has accumulated benefits under a registered pension plan (the "Pension Plan") since XXXXXXXXXX. In XXXXXXXXXX the Employer established a trusteed retirement compensation arrangement (the "RCA") to provide benefits to the Employee which supplement those provided in the Pension Plan. The RCA is a "retirement compensation arrangement" within the meaning assigned by subsection 248(1) of the Act. The RCA account number is XXXXXXXXXX.

4.In contemplation of the Employee's retirement, the RCA was amended and restated effective XXXXXXXXXX, pursuant to the provisions of an amending agreement (the "Amendment"), a copy of which was submitted with your ruling request. The Amendment

(a)removed the restrictions imposed on the RCA trustee's ability to borrow funds,

(b)provided that the normal form of benefits payable under the RCA are to be paid in equal monthly payments, and

(c)specifically allowed the RCA trustee to purchase an annuity in the Employee's name in order to provide the Employee with the benefits otherwise payable under the RCA.

5.The Employee intends to retire from the Employer effective XXXXXXXXXX, and has given the Employer notice of his proposed retirement.

6.The relevant terms of the RCA, as amended, are as follows:

(a)The primary purpose of the RCA is to provide the Employee with periodic pension benefits which cannot be provided under the Pension Plan;

(b)The Employee is entitled to a pension benefit equal to the Employee's "Accrued Pension Shortfall" which is calculated as the difference between XXXXXXXXXX% of "Highest Earnings" multiplied by years of service and the amount of the pension benefit which has accrued under the Pension Plan. The benefits under the RCA are payable to the Employee in equal monthly instalments;

(c)The RCA provides for the payment of survivor benefits to the Employee's spouse;

(d)There are provisions in the RCA which reduce the benefits otherwise payable in the case of early retirement. These reductions may be waived by the Employer;

(e)The Employer shall contribute to the RCA each year amounts not less than those certified by an actuary as being necessary to provide the benefits accruing in that year and to amortize any solvency deficiency or unfunded liability of the RCA;

(f)The Employee may, with the consent of the Employer, receive the benefits payable under the RCA in a form other than those described in the RCA provided such optional form of benefits is the actuarial equivalent of the benefits otherwise payable under the RCA;

(g)The RCA can be terminated at any time by the Employer provided the Employer pays all amounts into the RCA trust which are necessary to provide the RCA benefits and provided that the RCA assets are used to the extent required to provide the RCA benefits;

(h)Any surplus remaining in the RCA is to be distributed to the Employer.

7.The fair market value of the property held in the RCA as of XXXXXXXXXX, was approximately $XXXXXXXXXX and the refundable tax in respect of the RCA which was held by Revenue Canada was $XXXXXXXXXX.

8.Given the Employee's proposed retirement date, the RCA benefit has been estimated at $XXXXXXXXXX per year and it is estimated that the cost of purchasing an annuity to fulfil this obligation is $XXXXXXXXXX.

9.The Employer has to date funded the RCA in the manner described in paragraph 6(e). The difference between the value of the RCA's assets as described in paragraph 7 and the cost of an annuity to provide the RCA benefit as described in paragraph 8 is caused, in part, by the Employee's intention to retire earlier than expected and the relatively high cost of annuity contracts in the current market.

PROPOSED TRANSACTIONS

10.The Employer will give notice to the Employee that it is waiving the early retirement reductions otherwise applicable under the RCA (see 6(d) above).

11.The Employer will fully fund its obligations under the RCA by making a contribution of approximately $XXXXXXXXXX to the RCA (the "Terminal Contribution").

12.One-half of the Terminal Contribution will be remitted to Revenue Canada on account of refundable tax. The other half will remain in the RCA.

13.The trustee of the RCA will borrow from the Employer an amount (the "Loan") equal to the RCA's "refundable tax", within the meaning assigned by subsection 207.5(1) of the Act, at the end of the RCA's 1996 taxation year plus the amount remitted to Revenue Canada on account of the RCA's tax for its XXXXXXXXXX taxation year pursuant to subsection 153(1) of the Act. The Loan will bear a commercial rate of interest and be repayable immediately upon the RCA's receipt of the refundable tax.

14.The trustee of the RCA will use the assets in the RCA including the Loan (net of a reserve for expenses including interest on the Loan) to purchase annuity contracts in the Employee's name. The annuity contracts will, in aggregate, provide the Employee with the supplemental pension benefits to which he is entitled pursuant to the RCA. Each annuity contract will be a "prescribed annuity contract" within the meaning assigned by subsection 304(1) of the Income Tax Regulations (the "Regulations").

15.The trustee of the RCA will then assign all of the remaining assets of the RCA to the Employer as a prepayment of the interest which will accrue on the Loan. To the extent that the funds assigned to the Employer exceed the ultimate interest obligation of the RCA in respect of the Loan, such excess shall be considered a return of the surplus pursuant to the terms of the RCA (see 6(h) above).

16.The RCA will be terminated and the custodian of the RCA will file a final return in prescribed form pursuant to subsection 207.7(3) of the Act and will elect therein pursuant to subsection 207.5(2) of the Act to have the RCA trust's refundable tax at the end of its final taxation year determined in accordance with subsection 207.5(2) of the Act. At the end of the RCA's final taxation year, the RCA will not have any assets other than the right to claim a refund of its refundable tax and, therefore, the RCA's refundable tax at the end of its final taxation year will be deemed to be nil.

17.The refund of the RCA's refundable tax shall be used to satisfy the Loan.

PURPOSE OF THE PROPOSED TRANSACTIONS

18.The purpose of the proposed transactions is to:

(a)provide for the supplemental pension entitlement of the Employee under the RCA by purchasing annuity contracts in the name of the Employee with the RCA's assets; and

(b)eliminate the Employer's ongoing obligations in respect of the funding and administration of the RCA.

ADDITIONAL INFORMATION

19.To the best of your knowledge and that of the Employer, none of the issues involved in this ruling request is in an earlier return of the Employer or a related person, is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Employer or a related person, is under objection or appeal or has been before the courts, or is the subject of a ruling previously issued to the Employer or a related person.

RULINGS GIVEN

Provided that the statement of facts and proposed transactions are correct and constitute a complete disclosure of all the relevant facts and proposed transactions, and that the proposed transactions are completed in the manner described herein, we rule as follows:

A.By virtue of paragraph 254(a) of the Act no amount will be required to be included in the Employee's income in respect of the purchase by the RCA of the annuities in his name; he will be required to include in his income pursuant to subsection 56(1) of the Act the amount of each annuity payment received.

B.The Loan will not be considered a contribution to the RCA for purposes of the definition of "refundable tax" in subsection 207.5(1) of the Act.

C.Subsection 153(1) of the Act will not apply to require an amount to be withheld in respect of the purchase of the annuities.

D.The annuities purchased by the RCA in the name of the Employee will not be considered subject property of the RCA for purposes of Part XI.3 of the Act.

E.Subsection 245(2) of the Act will not be applied to redetermine the tax consequences of Rulings A through D above as a result of, in and of themselves, the proposed transactions described herein.

The above advance income tax rulings are given subject to the limitation and qualifications set forth in Information Circular 70-6R3 dated September 30, 1996, issued by Revenue Canada, and are binding upon Revenue Canada provided the proposed transactions described in 10 through 15 above are completed on or before XXXXXXXXXX.

Yours truly,

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