1999 Ruling 9910893 - 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 for maintaining notional accounts. Funds will not be held in trust for the benefit of participants and participants will not have any right to any assets held in respect of the plan. Such assets are available to the employerts general creditors.

The creation of this type of plan is not considered to be a taxable event (no benefit, RCA or SDA). The pension benefits are taxable when received.

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991089
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Attention: xxxxxxxxxx

XXXXXXXXXX, 1999

Dear Sirs:

Re: Request for Advance Income Tax Ruling
xxxxxxxxxx Supplemental Pension Arrangement

This is in reply to your letters of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayer.

Definitions and Abbreviations

In this letter, the following terms have the meanings specified:

(a)"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;

(b)"Employer" means XXXXXXXXXX
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Revenue Canada tax account XXXXXXXXXX
XXXXXXXXXX Taxation Centre
XXXXXXXXXX Tax Services Office;

(c)"Plan" means the proposed XXXXxxxxxx Supplemental Arrangement, a copy of which was provided with your submission,

(d)"Participant" means a person who is entitled to supplemental benefits under the Plan;

(e)"Board" means the Employer's Board of Governors;

(f)"RPP" means the XXXXXXXXXX Pension Plan with Registration number xxxxxxxxxx;

(g)"RCA" means a "retirement compensation arrangement" as defined in subsection 248(1) of the Act; and

(h)"SDA" means a "salary deferral arrangement" as defined in subsection 248(1) of the Act.

Relevant Facts

1. The Employer maintains the RPP for its employees. The benefit formula under the RPP is 2% multiplied by the member's pensionable service multiplied by the average of the employee's three highest plan year salaries. There is a reduction in pension benefits for each year a member retires before normal retirement age.

Proposed Transactions

2. The Employer proposes to establish the Plan.

3. The Plan will be available to employees so designated by the Employer's Board.

4. The Plan will provide benefits to compensate Participants for the loss of years of pensionable service under the RPP when a Participant retires early. A Participant who foregoes years of pensionable service under the RPP as a result of early retirement will be entitled to receive an additional amount from the Employer to compensate for the reduced pension benefits under the RPP.

5. Significant terms of the Plan are as follow:

a. Participants will receive a monthly benefit if their retirement occurs prior to age 65, equal to:

(i) the amount of pension which would have been calculated under the RPP had the additional years between the Participant's actual retirement date and the Participant's normal retirement date as defined under the RPP been used in the calculation of the pension

less

(ii) the amount of pension payable from the RPP under the normal form of payment in accordance with the provisions of the RPP.

b. The maximum additional years of pensionable service to be used in the calculation of benefits under a(i) above shall not exceed 5.

c. The Employer will be the sole legal and beneficial owner of any and all assets used tar the purposes of the Plan and all assets will remain the sole property of the Employer.

d. The assets held for the purpose of the Plan will be commingled with other assets of the Employer. No assets will be set aside or earmarked in the name of a Participant and no Participant will have any direct claim against any assets held for the purposes of the Plan.

e. All assets held for the purposes of the Plan will be available for the general creditors of the Employer.

f. No entitlements will be payable to Participants under the Plan before the earliest of a Participant's date of retirement, termination of employment (other than retirement) or death,

g. A Participant may designate a person to whom, in the event of the death at the Participant, entitlements under the Plan will be paid.

h. Subject to i. below, the employer will pay the benefits under the Plan to the Participant or the Participants designated beneficiary in monthly instalments for the life of the member or the designated beneficiary, as the case may be.

i. Benefits under the Plan will be payable in a form which is identical to the form of payment determined for benefits payable under the RPP. The provisions of the RPP with respect to normal and optional forms of payment apply to benefits payable under the Plan.

6. The Employer will maintain a memo account to track the Employer's approximate obligations under the Plan.

Purpose of the Proposed Transaction

7. The purpose of the Plan is to accelerate the early retirement incidence rate for senior employees by providing benefits that are not available under the terms of the RPP. It is also intended to act as an incentive to attract individuals into senior administrative positions with the Employer both from within the ranks of existing staff and externally. Generally employees may not seek senior administrative positions because those who are appointed to such positions often find it difficult to subsequently return to their former duties if the need arises. The early retirement benefits under the Plan may encourage qualified individuals to seek senior administrative positions.

Additional Information

8. To the best of your knowledge, the issues related to this request:

(a) have not previously been reported in the Employer's, or any related party's prior income tax returns;

(b) are not being considered by a tax services office in connection with any of the Employer's or any related party's prior income tax returns;

(c) are not under objection by the Employer or by any related person;

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

(e) are not the subject of a ruling previously issued by this Directorate.

Rulings

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, and the Plan is established in the manner described above, we rule as follows:

A. The Plan will not constitute an SDA.

B. The Plan will not constitute an RCA and consequently the provisions of Part XI.3 will not be applicable with respect to the Plan.

C. Each payment made by the Employer to a Participant or the Participant's designated beneficiary, as the case may be, under the Plan, will be included in the income of the recipient in the year it is received as a superannuation or pension benefit pursuant to subparagraph 56(1)(a)(i).

D. No amount will be included in the income of a Participant under subsection 5(1), paragraph 6(1)(a) or paragraph 56(1)(a) as a result of, in and by itself, the Participant's participation in the Plan, other than those described in Ruling C above.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada and are binding provided the proposed transactions are completed on or before
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Yours truly,

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