30 November 1997 Ruling 9732103 - SUP PENSION, SDA

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:

Is a supplementary pension plan a salary deferral arrangement for purposes of the Act?

Position:

Question of fact.

Reasons:

In this case, the employer was setting aside a specific sum to provide a supplementary pension plan with no affect on the participant's annual salary.

XXXXXXXXXX							973210
									XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling
Executive Retirement Plan for Employees
of XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling in respect of the above-referenced taxpayer. In your letters of XXXXXXXXXX, you informed us of additional information in respect of, and amendments to, the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

Our understanding of the facts, proposed transaction and purpose of the proposed transactions is as follows:

Facts

1. XXXXXXXXXX ("Employer") is a taxable Canadian corporation within the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act"). The Employer is a wholly-owned subsidiary of XXXXXXXXXX (the "Parent"), a public corporation whose shares are traded on XXXXXXXXXX.

The Employer deals with the XXXXXXXXXX Tax Services Office and files its income tax returns with the XXXXXXXXXX Taxation Centre.

2. The executives of the Employer are members of the Employer Salaried Employees' Pension Plan (XXXXXXXXXX) (the "RPP"). The Employer also sponsors a group registered retirement savings plan ("Group RRSP"). An executive is entitled to contribute to the Group RRSP to the extent of his or her "RRSP deduction limit", within the meaning assigned by subsection 146(1) of the Act, for a taxation year.

3. The Employer has also entered into individual pension agreements with selected executives to provide additional pension benefits (the "Pension Agreements"). Under the terms of the Pension Agreement, the executive and the Employer agree to the following:

(a) The executive ceases accruing further benefits under the RPP.

(b) The pension payable under the Pension Agreement to the executive upon the executive's normal retirement age is a lifetime pension equal to XXXXXXXXXX% of the average of the executive's highest XXXXXXXXXX consecutive months of compensation with the Employer, multiplied by the executive's years of service with the Employer, including fractions of years. The pension payable under the Pension Agreement is offset by any pension that is payable to the executive under the RPP.

(c) The pension is payable in the form of a joint and XXXXXXXXXX% survivor pension, with the survivor pension payable to the executive's surviving spouse. There is also a XXXXXXXXXX year guarantee period, in the event both the executive and the spouse die before XXXXXXXXXX years of payments have been made. If the executive terminates employment prior to his or her normal retirement age, the pension may commence on any date after attaining age 55, upon the election of the executive.

(d) The Pension Agreement also provides for certain pre-retirement death benefits.

4. The Parent's executives participate in a defined contribution savings plan under which the XXXXXXXXXX executives may contribute up to XXXXXXXXXX% of their annual compensation on a tax-deferred basis under XXXXXXXXXX tax laws whereunder the Parent contributes an additional XXXXXXXXXX% match of the executives' contributions, up to a maximum of XXXXXXXXXX% of the executive's annual compensation, as a means of supplementing their retirement income. The Employer's executives are not currently provided with any additional retirement income similar to those received by the Parent's executives.

Proposed Transaction

5. In order to provide its executives with additional retirement income similar to the income provided the Parent's executives, the Employer proposes to establish the "Executive Retirement Plan for Employees of the Employer" (the "Plan"). Under the terms of the Plan, the Employer will designate those executives who will be entitled to participate in the Plan (the "Participants"). The basic terms and conditions of the Plan that are relevant to the proposed transactions may be summarized as follows:

(a) The Employer will maintain a notional account for each of the Participants that participate in the Plan. The notional accounts will be maintained as a book reserve by the Employer.

(b) The Participant will be required to contribute an amount to his or her RRSP (the "RRSP Contribution") equal to the lesser of:

i) XXXXXXXXXX% of the first $XXXXXXXXXX of the Participant's annual compensation ($XXXXXXXXXX); and

ii) the Participant's RRSP deduction limit for the year. The expression "RRSP deduction limit" has the meaning assigned by subsection 146(1) of the Act.

The Participant will be entitled to make the RRSP Contribution to his or her account within the Group RRSP or to his or her own personal RRSP.

(c) The Employer will credit the Participant's notional account with an amount computed by the formula a + (b - c) where

a = XXXXXXXXXX% of the Participant's compensation for the year (the "First Amount").

b = XXXXXXXXXX% of the Participant's compensation for the year.

c = XXXXXXXXXX% of $XXXXXXXXXX.

The amount computed by the formula (b - c) shall be hereinafter referred to as the "Second Amount"). The Employer will not claim a deduction for the amounts credited to the Participants notional accounts.

(d) The Employer will credit the Participant's notional account with notional earnings in respect of amounts credited and the previous notional earnings related thereto for each year. The notional earnings will be computed as follows:

i) The notional earnings in respect of the First Amount (including any previous notional earnings in respect of the First Amount) will be credited at a rate of return equal to the rate of return earned on the Parent's stock.

ii) The notional earnings in respect of the Second Amount (including any previous notional earnings in respect of the Second Amount) will be credited at a rate of return equal to the rate of return earned on one or more investment funds selected by the Employer or at the rate of return on the Parent's stock (as directed by the Participant).

The Employer will not claim a deduction for the amounts credited to the Participants notional accounts in respect of any notional earnings.

(e) A Participant will be entitled to the amount credited to his or her notional account under the Plan on termination of employment, retirement, death or becoming disabled. A Participant will be considered disabled where the Participant meets the definition of "Disability" under the long-term disability insurance plan sponsored by the Employer under which the Participant is insured. Where a Participant's termination of employment or retirement from the Employer occurs prior to the Participant completing at least five years of continuous service with the Employer or with the Parent, the First Amounts and any notional earnings thereon shall be forfeited by the Participant (the "Forfeited Amounts"). The Participant's notional account will be reduced by the Forfeited Amounts.

(f) The amounts in a Participant's notional account will be paid out as follows:

i) In the event of a Participant's retirement, termination of employment or becoming disabled, the Participant may elect to receive the amount credited to his or her notional account (after the reduction for any Forfeited Amounts) in any of the following ways:

a)a single lump-sum payment;

b)five annual installments on a declining balance basis commencing as of that time;

c)ten annual installments on a declining balance basis commencing as of that time;

d)five annual installments on a declining balance basis commencing as of the date that the Participant is entitled to receive pension benefits under the Pension Arrangement; or

e)ten annual installments on a declining balance basis commencing as of the date that the Participant is entitled to receive pension benefits under the Pension Arrangement.

The Participant will notify the Employer of his or her payment choice at least 30 days prior to becoming entitled to any benefits under the Plan. Notional earnings will continue to be credited in respect of any amounts remaining in the Participant's notional account at the end of each year where a Participant has chosen a payment method described in options b, c, d or e herein.

ii) In the event of a Participant's death prior to the payment of benefits under the Plan, a single lump-sum payment equal to the Participant's notional account will be paid to the Participant's named beneficiary. In the event of a Participant's death after the payment of benefits under the Plan has commenced, the remaining amount in the Participant's notional account will be paid to the Participant's named beneficiary.

(g) The Employer may amend or terminate the Plan at any time. No amendment or termination of the Plan shall reduce a benefit under the Plan that has been accrued by a Participant in the Plan up to the date of such amendment or termination.

Purpose of the Proposed Transaction

6. The purpose of the proposed transaction is to provide executives with additional pension benefits that are more in line with the pension benefits enjoyed by the Parent's executives.

Additional Information

7. To the best of your knowledge and the knowledge of the Employer, none of the issues involved in this ruling request is being considered by a tax services office or taxation centre in connection with an income tax return already filed, and none of the issues is under objection or appeal.

Rulings Given

Provided that the statement of facts and proposed transaction are correct and constitute a complete disclosure of all of the relevant facts and proposed transaction, and that the terms of the Plan are as set out in your submissions and described in 5(a) to (f) above, we rule as follows:

A. The Plan does not constitute a "salary deferral arrangement" within the meaning assigned by subsection 248(1) of the Act.

B. The amount received by a Participant under the payment alternatives described in subparagraph 5(f)(i) above shall be included in the Participant's income under subparagraph 56(1)(a)(i) of the Act. For greater certainty, the amounts credited by the Employer to the Participant's notional account in any year will not result in any benefit under sections 5 or 6 of the Act being conferred on the Participant for that particular year.

C. The amount received by a Participant's named beneficiary as a result of the Participant's death as described in subparagraph 5(f)(ii) above shall be included in the recipient's income under subparagraph 56(1)(a)(i) of the Act.

D. Subject to paragraph 18(1)(a) and section 67 of the Act, any amounts referred to in rulings B and C above that are paid by the Employer to a Participant or a Participant's beneficiary in a particular year will be deductible by the Employer in accordance with section 9 of the Act.

E. The maintenance of notional accounts in respect of the Plan by the Employer will not be an "investment contract, as that term is defined in paragraph 12(11) of the Act, for the purpose of subsection 12(4) of the Act.

The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the Plan is implemented within six months of the date of this letter.

Yours truly,

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