19 November 1997 External T.I. 9726065 - RCA REFUNDABLE TAX CALCULATION

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:

	Questions on RCA refundable tax and the lending of 	RCA		funds to a contributing employer.

Position:

Directed writer to relevant provisions of the RCA Guide and noted position that could be developed concerning lending of funds contributed to an RCA.

Reasons:

Guide provides detailed explanations of steps to be taken. On loans we noted that when funds are loaned back to a contributing employer it is a question of fact whether an RCA exists.

972606
XXXXXXXXXX W.C. Harding

Attention: XXXXXXXXXX

November 19 1997

Dear Sirs:

Re: Retirement Compensation Arrangements (RCAs)

This is in reply to your letters of September 19 and October 10, 1997 in which you asked a number of questions concerning the refund of RCA refundable tax.

Please find enclosed a copy of the Department's Retirement Compensation Arrangement Guide in which you will find detailed responses to your questions of September 19. These are briefly discussed below.

As indicated on page 4 of the guide, a refund of tax is available where the refundable tax at the end of a year is less than the total of the refundable tax at the beginning of the year plus any tax remitted during the year. The guide also explains a special election that can be made to reduce the refundable tax otherwise calculated at the end of the year. This election may apply to allow a refund of taxes to the RCA when all other property of the RCA has been distributed.

When any tax is refunded to an RCA, the cash received can be distributed in accordance with the terms of the plan to beneficiaries of the plan, including the contributing employer. The funds may also be retained in the RCA if the terms of the RCA permit this. Any income earned on funds retained and any distributions made will, of course, effect the calculation of refundable tax at the end of the year.

In your letter of October 10, 1997 you referred to an article from the September 1997 CALU Report, Vol. VI, No. 3 and asked for our comments on certain points raised in it pertaining to an RCA borrowing funds secured by the RCA's refundable tax.

This portion of the report describes a situation where an employer contributes $2 million to an RCA with $1 million of this being remitted to the government. The RCA then borrows $900,000 from a bank using the refundable tax as collateral and lends this plus the remaining funds held by the RCA back to the employer.

It is our position that it is a question of fact whether an RCA will exist where funds are contributed by an employer to a custodian for the benefit of persons who are not dealing with the employer at arm's length, and the custodian lends the amount back to the employer.

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