1998 Ruling 9826433 - NOTIONAL DEFINED CONTRIBUTION PLAN

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: Whether an unfunded supplementary retirement arrangement results in current taxation.

Position: No.

Reasons: Investing funds, which are not held in trust and that are available for the general creditors of an employer is not considered to be a taxable event. The arrangement can be regarded as a pension plan and, as such, these pension benefits are taxable when received.

XXXXXXXXXX
XXXXXXXXXX 3-982643
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Request for Advance Tax Ruling
XXXXXXXXXX - Notional Defined Contribution Plan

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided by your letters of XXXXXXXXXX, as well as during our various telephone conversations (XXXXXXXXXX).

DEFINITIONS AND ABBREVIATIONS

In this letter, unless otherwise expressly stated or the context otherwise requires:

"Act" means the Canadian Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

"Canadian Corporation" has the meaning assigned by subsection 89(1);

"Compco" means XXXXXXXXXX;

"Opco" means XXXXXXXXXX;

"Parentco" means XXXXXXXXXX, a United States corporation which is the parent company of Opco;

"Participant" means an eligible employee who is a beneficiary under the Plan;

"Plan" means the proposed Notional Defined Contribution Plan of Opco;

"RCA" (or "retirement compensation arrangement") has the meaning assigned by subsection 248(1);

"RPP" (or "registered pension plan") has the meaning assigned by subsection 248(1);

"RRSP" (or "registered retirement savings plan") has the meaning assigned by subsection 146(1);

"SDA" (or "salary deferral arrangement") has the meaning assigned by subsection 248(1).

RELEVANT FACTS

1. Opco is a Canadian Corporation.

2. Opco's address is:

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

3. Opco's Tax account number is XXXXXXXXXX.

4. Opco deals with the XXXXXXXXXX Tax Services Office located at XXXXXXXXXX, and files its tax returns with the XXXXXXXXXX Tax Centre.

5. Opco maintains an RPP for its salaried employees ("Members") entitled the Pension Plan for Employees of Opco ("PPEO") under Revenue Canada registration number XXXXXXXXXX. The PPEO provides to a Member a pension benefit equal to XXXXXXXXXX% of the Member's final average earnings up to the final average Year's Maximum Pensionable Earnings plus XXXXXXXXXX% of the Member's final average earnings in excess of the final average Year's Maximum Pensionable Earnings, multiplied by the Member's years of credited service. The PPEO permits eligible employees to opt out of participation. Most higher-paid employees of Opco do not participate in the PPEO.

6. Opco merged with Compco earlier this year. Compco maintains an RPP for its salaried employees under Revenue Canada registration number XXXXXXXXXX. The RPP of Compco is a combination of defined benefit and defined contribution pension plan. Most higher-paid employees of Compco opt out of participation in the RPP.

7. Both pension plans described in paragraphs 5 and 6 above are referred to collectively herein as the "Pension Plan". Further, all subsequent references in this ruling request to Opco include Compco.

8. The limits in the Act on tax-assisted retirement savings restrict the amount of retirement savings that the highly-paid employees of Opco may accumulate in order to provide an adequate retirement income, calculated on the basis of a specified percentage of pre-retirement compensation. The maximum defined benefit accrual permissible under the Act equal to $1,722 per year of service is reached by an employee whose final average earnings are at or above approximately $105,000. The maximum defined contribution limit is reached at an earnings level of $75,000 ($75,000 x 18% = $13,500). For employees whose earnings significantly exceed these levels, the amount of pension payable from the Pension Plan, together with other tax-assisted retirement savings, is inadequate.

9. Highly-paid employees of Parentco, in the United States, participate in a notional defined contribution plan under which the highly-paid employees make an annual election under which up to XXXXXXXXXX% of their incentive compensation for the following year is allocated by Parentco to a notional defined contribution account. The accumulated notional amounts together with notional earnings, are paid to the employees (or their estates) upon certain events, e.g., termination of employment, retirement or death, or at the date chosen by the employee at the time the election is made, and may not be withdrawn prior to such events except upon the occurrence of limited specified hardship events. The amounts set aside in the notional contribution account are not included in employees' income for United States tax purposes until received.

PROPOSED TRANSACTIONS

10. The intended effective date of the Plan is XXXXXXXXXX.

11. The Plan will operate as follows:

(a) Under the terms of the Plan, employees of Opco whose total annual compensation exceeds the Canadian equivalent of US $XXXXXXXXXX shall participate in the Plan. However, as is consistent with the Pension Plan, an employee may elect to opt out of participating in the Plan. To elect out of participating in the Plan the employee must, when first eligible to participate in the Plan, file a written election with Opco opting out of participating in the Plan. Employees who elect to decline enrollment shall not be eligible to join the Plan for the duration of their employment with Opco. However, Opco, in its discretion, may permit such an employee to enroll in the Plan in the event the employee's compensation or role in the company changes significantly.

(b) Under the terms of the Plan, Opco proposes to establish and maintain in respect of each Participant a notional account (the "Account"). Subject to 11(c) below, every Account will be credited with notional amounts representing notional defined contribution amount made by Opco (the "Contributions") net of notional fee (the "Fees"), and notional earnings (the "Earnings") recorded thereto.

(c) The notional amounts credited to an Account shall be recorded as a book reserve of Opco and shall be notionally denominated in US currency. The Plan shall not be prefunded in any manner and there shall not be any security established in respect of such notional amounts.

(d) The Contributions amount which will be credited by Opco to a Participant's Account, for a year, shall be determined by the formula

A x ( B - C )
where

A is the Notional Defined Contribution Percentage of XXXXXXXXXX %,

B is the Participant's total eligible compensation for the year, and

C is the amount of the "RRSP dollar limit" as defined in subsection 146(1) divided by 18%.

(e) For purposes of the formula in paragraph 11(d) above, the benefits to be provided under the Plan are on total eligible compensation in excess of the "RRSP dollar limit" in order to integrate the benefits payable under the Plan with the limits on tax-assisted retirement savings under the Act. The maximum annual defined contribution accrual under such limits is 18% of pensionable earnings to a current maximum of $13,500, which is reached at an earnings level of $75,000.

(f) The introduction of the Plan by Opco represents a fundamental change in the structure of the compensation and retirement benefits of Opco's employees. The implementation of, or the participation in, the Plan as well as Opco's Contributions under the Plan will not be made in lieu of any amounts to which Participants are otherwise legally entitled, by virtue of their employment.

(g) The Fees amount which will be deducted annually by Opco from the Contributions amount in accordance with paragraph 11(b) above, shall be determined by the formula

D x E
where

D is the "specified percentage", and

E is the Contributions amount determined in accordance with paragraph 11(d) above.

(h) The "specified percentage" for 1999 shall be XXXXXXXXXX %, but may be subject to change in future years.

(i) Subject to paragraph 11(c) above, the Earnings amount credited to a Participant's Account shall be recorded at least annually. The Earnings amount shall equal the total rate of return, including gains, losses and dividends, on notional investments elected by the Participant. Opco shall specify a list of notional investment choices.

XXXXXXXXXX

Participants shall be entitled to make investment elections once each year.

(j) Opco may, at its discretion, actually invest amounts in mutual funds and other investment vehicles XXXXXXXXXX to mirror the investment options notionally elected by Participants. Such investments will be made from the general corporate funds of Opco. These earmarked assets will continue to belong to Opco and Participants will not have any claims against these assets. Such assets shall not be held in trust by Opco or any related person to Opco, either on behalf of Opco or Participants, shall not be earmarked for purposes of the Plan, and shall be subject to the claims of general creditors of Opco in the event of the dissolution or bankruptcy of Opco. In the alternative, Parentco may make the investments.

(k) A Participant's Account will not entitle the Participant any right to receive payments under the Plan, except as described in paragraph 11(l) below.

(l) Opco shall not be under any obligation to provide any benefits under the Plan in respect of a Participant until the occurrence of one of the following events:

(i) Death of the Participant prior to retirement.

(ii) Termination of the Participant prior to retirement. The term "termination" means a loss of an office or employment of the Participant from Opco or any related person to Opco. The Participant's termination may also occur at the time the Participant becomes disabled and qualifying for disability benefits under the group long-term disability insurance plan sponsored by Opco for its employees.

(iii) Retirement of the Participant from Opco or any related person to Opco.

(m) In the event of a Participant's retirement, the balance of the Participant's Account shall be paid by Opco and received by the Participant upon the retirement date in a lump sum payment, or in two, five, ten or fifteen annual installments or payments over the Participant's lifetime, commencing upon the retirement date or any subsequent date up to the normal retirement date under the Pension Plan, namely, the date the Participant attains age 65, as elected by the Participant prior to the Participant's retirement. All amounts paid to the Participant will be subject to applicable withholding of income tax.

(n) In the event of a Participant's termination, the Participant shall receive a lump sum payment equal to the balance of the Participant's Account upon the termination date. All amounts paid to the Participant will be subject to applicable withholding of income tax.

(o) Upon the death of a Participant prior to full payment of benefits under the Plan, any remaining accumulated amount in the Participant's Account shall be paid to the Participant's beneficiary or estate in the form of a single lump sum payment, subject to applicable withholding of income tax.

(p) Subject to paragraphs 11(l) to (o) above, the Earnings continue to be credited to the remaining balance of the Participant's Account for the duration of the payment period.

PURPOSE OF THE PROPOSED TRANSACTIONS

12. Opco proposes to establish the Plan for eligible highly-paid employees in Canada in order to fulfill certain objectives:

a) to replicate the US Plan to the extent possible, thus facilitating the transfer of employees between business operations in various countries;

b) to provide an opportunity for highly-paid employees to earn an adequate level of retirement income;

c) to provide the benefits under the Plan such that they are not taxable to the employees and not tax-deductible to Opco until paid; and

d) to encourage valued employees to remain with Opco by providing competitive benefit programs.

OTHER INFORMATION

13. To the best of your knowledge and that of Opco none of the issues in respect of which rulings are herein requested is:

(a) in an earlier return of Opco or a related person,

(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of Opco,

(c) under objection by Opco or a related person,

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

(e) the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

14. To the best of your knowledge and Opco' s knowledge, this request for an advance income tax ruling contains all the relevant facts and provides a full and fair presentation of the proposed arrangement in respect of the rulings sought.

RULINGS GIVEN

Provided the above statement of facts and proposed transactions are accurate and constitute a complete disclosure of all relevant facts and provided the transactions are completed as proposed, that the proposed Plan is established in the manner described in paragraphs 11(a) through (p) above, we rule as follows:

A) The Plan will not constitute a RCA.

B) No amount will be included in the income for a year of a Participant to whom the crediting of notional contributions (described in paragraph 11(d)) and notional earnings (described in paragraph 11(i)) relate under subsection 5(1), paragraph 6(1)(a), paragraph 56(1)(a) or subsection 56(2) as a result of the recording of Contributions and Earnings under the Plan as a book reserve of Opco.

C) The recording of Contributions and Earnings under the Plan as a book reserve of Opco does not constitute a SDA and therefore does not confer a taxable benefit on the Participants to whom the Contributions relate, under subsection 6(11) or 6(12).

D) The recording of Contributions under the Plan as a book reserve of Opco and the annual crediting of Earnings to the book reserve does not constitute an investment contract as that term is defined in subsection 12(11) and therefore no amount is included in the income of the Participant to whom the contributions relate under subsection 12(4).

E) No amount will be included in the income of a Participant to whom the contributions relate under subsection 5(1), paragraph 6(1)(a), paragraph 56(1)(a) or subsection 56(2) as a result of the election of notional investment choices by the Participant.

F) All benefit payments under the Plan by Opco to the Participants and their beneficiaries (including, for greater certainty, any applicable withholdings thereon) will be taxable to such recipient under subparagraph 56(1)(a)(i) in the year in which the payments are received.

G) All benefit payments under the Plan by Opco to the Participants and their beneficiaries will be deductible in computing Opco's income for tax purposes in accordance with section 9, subject to the limitations in paragraph 18(1)(a), subsection 18(9) and section 67.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 of December 30, 1996, issued by Revenue Canada Taxation, and are binding provided the proposed transactions are completed and effective 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