1999 Ruling 9909123 - SUPPLEMENTAL PENSION ARRANGEMENT

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 supplemental pension arrangement results in current taxation.

Position: No.

Reasons: The plan provides notional accounts will be maintained in respect of participants. In-house "funding" will be made but the amounts will not be held in trust for the benefit of the participants, the participants have no right to these assets and the assets are available to the general creditors of the employer. This type of plan satisfies the purpose test of not being a salary deferral arrangement and is not a retirement compensation arrangement. The pension benefits are taxable upon receipt.

XXXXXXXXXX
XXXXXXXXXX 990912
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letters dated XXXXXXXXXX, wherein 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).

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

Relevant Facts

1. XXXXXXXXXX (the "Employer") is located in XXXXXXXXXX. The Employer files its information returns with and is serviced by the XXXXXXXXXX Taxation Centre.

2. The Employer presently maintains a registered defined benefit pension plan (the "RPP") for its staff and academic members, The defined benefits provided to the RPP members for each year of eligible service is XXXXXXXXXX% of the average of the best XXXXXXXXXX years of earnings (up to the maximum levels permitted under the Income Tax Act (the "Act") and the Income Tax Regulations).

3. Each year, members of the RPP contribute XXXXXXXXXX% of the first $XXXXXXXXXX of their earnings and XXXXXXXXXX% of their earnings over $XXXXXXXXXX up to the salary level that corresponds to the maximum permitted pension. Currently, this salary level is $XXXXXXXXXX. The Employer matches the member contributions to the RPP and is responsible for any additional contributions that may be required to fund the defined benefits under the RPP (liabilities in excess of contributions and surplus allocations).

4. The Employer also has employees that are members of the XXXXXXXXXX.

5. The Employer applied for and received an advance income tax ruling with respect to a similar plan on XXXXXXXXXX, 1996 (File # 953306-3). The proposed transactions described therein were never implemented.

Proposed Transaction

6. Effective XXXXXXXXXX, the Employer proposes to establish a supplemental retirement arrangement (the "Arrangement"). The Arrangement will provide the following:

(a) The Board XXXXXXXXXX of the Employer will designate the employees that will be entitled to participate in the Arrangement (the "Participants"). A Participant will be eligible to participate in the Arrangement as of the first day of the month in the calendar year in which the Participant's annual salary exceeds $XXXXXXXXXX or XXXXXXXXXX of the money purchase limit, within the meaning assigned by 147.1(1) of the Act; for the year, if greater (the "Annual Limit"). The Arrangement will be administered by the Employer.

(b) A notional account will be maintained for each Participant. Subject to the limit described herein, the Participant's notional account will be credited each month with an amount equal to XXXXXXXXXX % of the amount by which the Participant's annual salary exceeds the Annual Limit (which, ignoring compounding, equates to the annual RPP contribution rate of XXXXXXXXXX%) However, no amounts will be credited to the Participant's notional account in respect of the Participant's annual salary that exceeds $XXXXXXXXXX or XXXXXXXXXX of the money purchase limit, within the meaning assigned by 147.1(1) of the Act, for the year, if greater. No amounts will be credited to a Participant's notional account for periods subsequent to the Participant's retirement, termination or death. The Participant will be entitled to an annual statement which will inform the Participant of the status of the Participant's notional account.

(c) The Employer will set aside and invest a sum of money equal to the aggregate amounts credited to Participants notional accounts under the Arrangement. The earnings realized on such funds will be credited proportionately (based on the amount credited to a Participant's notional account relative to the aggregate of all amounts credited to all of the Participants' notional accounts) to the Participant's notional account.

(d) The amounts set aside by the Employer to fund its obligations under the Arrangement will belong to the Employer and will be available to the general creditors of the Employer. The Participants will not have any direct claims against these assets. The amounts set aside will not be held in trust for the benefit of the Participants and they will not be set aside in the name of any particular Participant or Participants. The Participants' notional accounts will be a general liability of the Employer

(e) A Participant will not be entitled to receive amounts credited to his or her notional account before the earliest of his or her retirement, termination of employment or death. When a Participant retires, terminates his or her employment with the Employer or dies, the Employer will pay an amount equal to the balance in the Participant's notional account calculated in annual installments over a period of XXXXXXXXXX years to the Participant or, where the Participant has died, to the Participant's beneficiary.

(f) A Participant or, if the Participant dies before retirement or termination, the beneficiary, may elect:

(i) to receive the payments in annual installments on XXXXXXXXXX over a period of fewer than XXXXXXXXXX years, or in a lump sum. The first payment or, where a lump sum pay-out is requested, the payment will be made on XXXXXXXXXX coincident with or following the Participant's retirement, termination of employment or death; or

(ii) to defer to lump-sum payment or the commencement of the annual installments to a date not later than XXXXXXXXXX of the calendar year containing the Participant's XXXXXXXXXXth birthday with the succeeding annual installments being made on the anniversary date of the first payment.

Purpose of the Proposed Transactions

7. The purpose of the Arrangement is to provide a process by which the Employer can provide a level of retirement income to the Participants that is consistent with their rate of earnings with the Employer

Additional Information

8. To the best of your knowledge and the knowledge of the Employer, none of the issues involved in this request for an advance income tax ruling:

(a) is in an earlier return of the Employer or of a person related to the Employer;

(b) is being considered by a tax services office or taxation centre in connection with a previously filed return of the Employer or of a person related to the Employer;

(c) is under objection by the Employer or by a person related to the Employer;

(d) is before the courts; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate (other than as described in paragraph 5 above)

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described herein, we rule as follows:

A. The Arrangement will not constitute a salary deferral arrangement as that term is defined in subsection 248(1) of the Act.

B. The Arrangement will not constitute a retirement compensation arrangement as that term is defined in subsection 248(1) of the Act and, consequently, the provisions of Part XI.3 of the Act will not be applicable to the Arrangement.

C. All payments made by the Employer to a Participant (or his or her beneficiary in the case of death) under the Arrangement will be included in the recipient's income the year it is received as a superannuation or pension benefit pursuant to subparagraph 56(1)(a)(i) 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 proposed transactions are completed within six months of the date of this letter.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate