30 November 1997 Ruling 9733923 - 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 or the security provided for the letter of credit.

Position:

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

Reasons:
It was confirmed that an actual trust will be established and not merely an arrangement that is deemed to be a trust under subsection 207.6(1) the Act. Contributions are the amounts actually paid to the trust.  The letter of credit was acquired by the trustees and does not form part of the contribution.  In this case the security for the letter of credit is not considered to be a contribution to the RCA.
XXXXXXXXXX
XXXXXXXXXX 	973392
			XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX 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:

a. "Act" means the Income Tax Act;

b. "Regulations" means the Income Tax Regulations;

c. "Employer" means XXXXXXXXXX;

e. "Pension Plans" means XXXXXXXXXX;

f. "SERP" means the XXXXXXXXXX Supplementary Executive Retirement Plan for executive employees of the Employer which was effective XXXXXXXXXX as provided with your request;

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

h. "RCA Trust" means a trust to be established with a group of three individuals acting as trustee and custodian of the SERP, where two of the trustees will be officers from the employer and the third an independent individual.

I. “Bank” means XXXXXXXXXX.

Facts

1. The Employer currently maintains the Pension Plans as described above.

2. The current executives of the Employer have their pensions under the Pension Plans limited to the maximum permitted under the Act and Regulations. However, these employees are provided additional amounts under the SERP computed in accordance with the terms of the SERP.

3. The SERP provides for funding in accordance with section XXXXXXXXXX of the SERP. However no funding of the SERP has been made to date. Section XXXXXXXXXX of the SERP provides as follows:

	XXXXXXXXXX 	Funding

(1) The Corporation shall secure its obligations under the Plan by a letter of credit held under a trust deemed a Retirement Compensation Arrangement under the Income Tax Act.

(2) In the event that the trustee is required to draw on the letter of credit in order to fund the benefits under the Plan, all benefits under the Plan shall be settled by way of lump sum payments equal to the Commuted Value of the benefits under the Plan.

4. In accordance with article XXXXXXXXXX of the SERP, the employer wishes to provide security for the outstanding obligations of the Employer under the SERP by way of a letter of credit.

Proposed Transaction

5. The Employer will establish the RCA Trust.

6. 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.

7. The RCA Trust will acquire a letter of credit from the Bank and 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.

8. A “Designated Event” occurs if the trustee of the RCA trust receives written notice from a participant that the Employer failed to make a required payment under the SERP, or if the trustee fails to receive a replacement letter of credit

9. On the occurrence of a Designated Event, the trustee of the RCA Trust may draw on the letter of credit in accordance with the terms of section XXXXXXXXXX of the SERP, as described in paragraph 3 above. In such a case, the proceeds of the letter of credit less any refundable RCA tax payable will be contributed to the RCA Trust in order to fund the obligations of the SERP.

Purpose of the Proposed Transaction

10. 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 under the SERP by way of a letter of credit which will be triggered only if the Employer fails to meet its obligations as provided in the SERP.

Additional Information

11. None of the issues involved in the ruling request are, to the best of your knowledge:

(i) in an earlier return of the Employer or a related person,

(ii) 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,

(iii) under objection or appeal,

(iv) before the courts, or if a judgement has been issued, the time limit for appeal to a higher court has not expired, and

(v) are the subject of a ruling previously issued by the Directorate.

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;

iii. any amount received by the RCA Trust under the terms of the letter of credit should the trustee draw on the letter of credit for any reason;

iv. any amounts remitted to the receiver general as a result of a draw on the letter of credit; and

no amount will be included as a contribution 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.

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.

Yours truly,

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