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:
Can proposed 254(a) apply to a contract where the payment is made after July 30, 1997?
Position:
Yes, in some circumstances.
Reasons:
Payment is only one criteria to conclude whether or not there is a contract.
XXXXXXXXXX 972235
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: Advance Income Tax Ruling - Section 254 and
Retirement Compensation Arrangements
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX) and your Facsimile transmissions of XXXXXXXXXX.
FACTS
1. The Company is incorporated under the laws of XXXXXXXXXX with its head office in XXXXXXXXXX.
2. XXXXXXXXXX (the "Member") is the President of the Company and is a resident of Canada for the purposes of the Income Tax Act (Canada) (the "Act"). The Member is not related to the Company.
3. Prior to XXXXXXXXXX, the Member had accumulated benefits under a pension plan for designated senior executives of the Company (the "Former Plan"). On XXXXXXXXXX, the Company established an executive pension plan (the "Pension Plan") for the Member and the assets of the Former Plan were transferred to the Pension Plan. The Pension Plan is a "registered pension plan" within the meaning of subsection 248(1) of the Act. In accordance with the provisions of the Act, the Pension Plan contains limitations on the maximum benefit that may be paid under the Pension Plan to the Member.
4. In XXXXXXXXXX, the Company established a trusteed retirement compensation arrangement (the "RCA") to provide benefits to the Member 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.
5. The Member intends to retire from the Company effective XXXXXXXXXX and has given the Company notice of his proposed retirement. In contemplation of this retirement, the Company proposed a series of transactions to annuitize the RCA. These transactions are as follows:
(a) The Company would give notice to the Member that it was waiving the early retirement reductions otherwise applicable under the RCA.
(b) The Company would fully fund its obligations under the RCA by making a contribution of approximately $XXXXXXXXXX to the RCA (the "Terminal Contribution").
(c) One-half of the Terminal Contribution would be remitted to Revenue Canada on account of refundable tax. The other half of the Termination Contribution would remain in the RCA.
(d) The trustee of the RCA would borrow from the Company 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 1997 taxation year pursuant to subsection 153(1) of the Act. The Loan would bear a commercial rate of interest and be repayable immediately upon receipt of the refundable tax.
(e) The trustee of the RCA would 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 Member's name. The annuity contracts would, in aggregate, provide the Member with the supplemental pension benefits to which he is entitled pursuant to the RCA. The annuity contracts would be a "prescribed annuity contracts" within the meaning assigned by subsection 304(1) of the Income Tax Regulations (the "Regulations").
(f) The trustee of the RCA would then assign all of the remaining assets of the RCA to the Company as a prepayment of the interest which would accrue on the Loan. To the extent that the funds assigned to the Company exceed the ultimate interest obligation of the RCA in respect of the Loan, such excess was to be considered a return of surplus pursuant to the terms of the RCA.
(g) The RCA would then be terminated and the custodian of the RCA would file a final return in the prescribed form pursuant to subsection 207.7(3) of the Act and would 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 trust's final taxation year, the RCA would 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 would be deemed to be nil.
(h) The refund of the RCA's refundable tax would then be used to satisfy the Loan.
6. On XXXXXXXXXX, 1997, the Company received the following rulings (the "Previous Rulings") from the Directorate in respect of the transactions listed in paragraph 5:
(a) By virtue of paragraph 254(a) of the Act, no amount would be required to be included in the Member's income in respect of the purchase by the RCA of the annuities in his name; he would 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 would not be considered a contribution to the RCA for the purposes of the definition of "refundable tax" in subsection 207.5(1) of the Act.
(c) Subsection 153(1) of the Act would 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 Member would not be considered subject property of the RCA for the purposes of Part XI.3 of the Act.
(e) Subsection 245(2) of the Act would not be applied to redetermine the tax consequences of Rulings (a) through (d) above as a result of, in and of themselves, the transactions described above in paragraph 5.
7. Upon receipt of the Previous Rulings, the Company initiated the transactions described in paragraph 5 prior to July 31, 1997.
8. On XXXXXXXXXX submitted an annuity quotation (the "XXXXXXXXXX Quotation") to the Company. The annuity that was the subject of the quotation (the "XXXXXXXXXX Annuity") was intended to provide the Member with XXXXXXXXXX% of the benefits to which the Member is entitled under the RCA. On that same day, the Company and the Member completed an application form (the "XXXXXXXXXX Application") agreeing to the terms of the XXXXXXXXXX quotation. The Company requested and received a rate guarantee from XXXXXXXXXX and in so doing made an irrevocable commitment to transfer RCA funds to XXXXXXXXXX to purchase the annuity. The XXXXXXXXXX Application was submitted to XXXXXXXXXX on XXXXXXXXXX.
9. On XXXXXXXXXX submitted an annuity quotation (the "XXXXXXXXXX Quotation") to the Company. The annuity that was the subject of the quotation (the "XXXXXXXXXX Annuity") was intended to provide the Member with XXXXXXXXXX% of the benefits to which the Member is entitled under the RCA. An application form (the "XXXXXXXXXX Application") was completed by the Member and the Company on that same day and submitted to XXXXXXXXXX agreeing to the terms of the XXXXXXXXXX Quotation; however the Company did not make an irrevocable commitment to transfer any RCA funds to XXXXXXXXXX.
10. Pursuant to the terms of the XXXXXXXXXX Quotations, funds were to be advanced by the RCA to XXXXXXXXXX and the XXXXXXXXXX Annuity would be issued upon receipt of such funds. The RCA trustee had been advised of the arrangements with XXXXXXXXXX and was prepared to transfer the required funds from the RCA on XXXXXXXXXX.
11. On July 31, 1997, the Department of Finance Canada released legislative proposals (the "Legislative Proposals") which purport to amend certain provisions of the Act including Section 254. Pursuant to the Legislative Proposals, s. 254 of the Act will only apply where a document has been issued or a contract has been entered into before July 31, 1997 purporting to create, to establish, to extinguish or to be in substitution for, a taxpayer's right to an amount or amounts, immediately or in the future, out of or under a superannuation or pension fund or plan. Also proposed paragraph 254(a) basically provides that there is no immediate taxable benefit where, among other things, the taxpayer acquired an interest under the document or in the contract before July 31, 1997. The originally scheduled advance of funds by the RCA was postponed pending further review of the Legislative Proposals.
PROPOSED TRANSACTIONS
12. The Company will advance the funds to XXXXXXXXXX for the XXXXXXXXXX Annuity.
13. The Company will advance the funds to XXXXXXXXXX for the XXXXXXXXXX Annuity.
PURPOSE OF THE PROPOSED TRANSACTIONS
14. The purpose of the proposed transactions is to:
(a) provide for the supplemental pension entitlement of the Member under the RCA by purchasing the XXXXXXXXXX Annuity and XXXXXXXXXX Annuity in the name of the Member with the RCA's assets; and
(b) eliminate the Company's ongoing obligations in respect of the funding and administration of the RCA.
15. The mailing address of the Company is:
XXXXXXXXXX.
16. The Company's tax account number is XXXXXXXXXX. The Company files its tax returns at the XXXXXXXXXX Tax Services Office.
17. The RCA account number is XXXXXXXXXX.
18. The Member's social insurance number is XXXXXXXXXX.
19. To the best of your knowledge, none of the issues involved in this ruling are being considered by a Tax Services Office or Taxation Centre in connection with a tax return already filed, and none of the issues are under objection or appeal.
You have requested a ruling that paragraph 254(a) as amended by the proposed legislation would apply to the acquisition of both the XXXXXXXXXX Annuity and the XXXXXXXXXX Annuity such that no amount will be required to be included in the Member's income in respect to the issuance of the aforementioned annuities. As stated in paragraph 20 of Information Circular 70-6R3, Revenue Canada does not provide advance income tax rulings on proposed legislation.
However, provided the above statements of facts and proposed transactions are accurate and constitute complete disclosure of the facts and proposed transactions, and that the proposed transactions are completed as declared herein, and provided the proposed legislation is passed as released on July 31, 1997, it is our opinion that proposed paragraph 254(a) of the Act will apply to deem the Member not to have received a benefit by the issuance of the XXXXXXXXXX Annuity but it will not apply in the same manner to the XXXXXXXXXX Annuity.
We trust these comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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