30 November 1996 Ruling 9718073 - RCA FUNDED WITH 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:

Confirmation of value of contributions where a letter of credit is held in a trust governed by an RCA

Position:

Provided confirmation that contributions did not include the value of the letter of credit acquired by the trust

Reasons:

Contributions are limited to the amounts actually paid to the trust. The letter of credit was acquired by the trustees and does not form part of the contribution.

XXXXXXXXXX							971807
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX - Advance Income tax ruling

This is in reply to your letters of XXXXXXXXXX, in respect of the above noted taxpayer.

Definitions

In this letter the following terms have the meanings specified:

"Act" means the Income Tax Act;

"Regulations" means the Income Tax Regulations;

"Employer" means XXXXXXXXXX;

"Pension Plan"means the XXXXXXXXXX Employees Pension Plan having registration number XXXXXXXXXX;

"SRBP" means the Supplementary Retirement Benefit Plan for executive employees of XXXXXXXXXX as provided in draft;

"RCA" means retirement compensation arrangement as defined in section 248(1) of the Act;

"RCA Trust"means a trust established with the XXXXXXXXXX or such other trustee as may be appointed in accordance with the terms of the Trust Agreement as provided in draft;

Facts

The Employer currently maintains the Pension Plan as described above.

The current executives of the Employer have their pensions under the Pension Plan limited to the maximum permitted. However, these employees are provided additional amounts under the SRBP computed in accordance with the terms of the SRBP.

The SRBP is an unfunded and unregistered plan.

The employer wishes to amend the SRBP to provide security for the outstanding obligations of the Employer thereunder by way of a letter of credit, and to provide funding of the obligations in certain circumstances.

Proposed Transaction

The Employer will establish the RCA Trust.

The Employer will contribute the cost amount of a letter of credit to the RCA Trust. The Employer will remit an equal amount to Revenue Canada in respect of the refundable tax on the contribution.

The Trustee will acquire a letter of credit from a bank and the RCA Trust will be named as the beneficiary under the letter of credit. The letter of credit will be secured by the general credit worthiness of the Employer. No assets of the Employer will be earmarked or otherwise held as security for the letter of credit.

Under the terms of the SRBP as amended, the trustee of the RCA Trust may draw on the letter of credit on the occurrence of a Designated Event as defined in the SRBP. In such a case, the proceeds of the letter of credit less any refundable RCA tax payable will be contributed to the RCA Trust.

A Designated Event will occur if the trustee of the RCA trust receives written notice from a participant that the company failed to make a required payment under the SRBP, or if the trustee fails to receive a replacement letter of credit in accordance with the terms of the SRBP.

Purpose of the Proposed Transaction

The purpose of the proposed transactions is to provide a certain level of comfort for the executive employees in terms of securing the retirement benefits by way of a letter of credit which will be triggered only if the Employer fails to meet its obligations as provided in the SRBP as amended.

Additional Information

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 Employer, the executives 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 establishment of the RCA Trust and the contribution to it as described in paragraph 6 above will result in the establishment of an RCA as that term is defined in subsection 248(1) of the Act.

B.For the purposes of 207.7(1) of 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 RCA Trust by or on behalf of the Employer, the Employer's contributions to the RCA Trust will be:

i. the cash paid to the RCA Trust by the Employer as specified in paragraphs 6 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 Regulations; and

iii. any amount received by the RCA Trust 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; and

no amount will be included with respect to the security described in paragraph 7 above;

C.Contributions described in B above, made by or on behalf 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

D.No participating 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 RCA 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.

Comments

You have not requested and we have not provided any ruling on the application of paragraph 60(j.1) of the Act to amounts paid out of the SRBP and nothing in this ruling should be construed as implying that Revenue Canada accepts that any amounts paid out of the SRBP can be treated as a retiring allowances as defined in the Act.

Yours truly,

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