17 January 2000 Income Tax Severed Letter 9933266 - RCA CONTRIBUTIONS

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:

1. Can funds be transferred between RCAs as a consequence of a marriage breakdown?

2. Can an employee contribution to an RCA be treated as a refundable overpayment of taxes if it is not deductible under paragraph 8(1)(m.2)?

Position:

1. Yes but the consequences may not be as expected.

2. No.

Reasons:

1. The taxability of the amounts to the employee may continue under the provisions of the Act.

2. Non-deductibility of the contributions will not result in an overpayment of any taxes.

		January 17, 2000

	HEADQUARTERS	HEADQUARTERS
	Paul Remillard	W.C. Harding
	Manager, Policy & Technical Services	(613) 957-8953
	Trust Accounts Division

	Attention: Lloyd MacKay
		1999-001524

Retirement Compensation Arrangements ("RCAs")

This is in reply to your facsimile received December 22, 1999, in which you asked us to comment on two situations for which you have been requested to provide replies.

Situation 1

In this situation a taxpayer is a member of his employer's RCA. The taxpayer's former spouse is the shareholder of a wholly-owned holding corporation. You have been asked if the taxpayer's former spouse can cause the holding company to create an RCA for her benefit and have an amount transferred from the husband's RCA to her RCA pursuant to a marriage breakdown agreement but still have the transfer subject to the provisions of subsection 207.6(7) of the Income Tax Act (the "Act").

Our Comments

Consideration should first be given to the ability of the former spouse to have an RCA established by a holding company. In basic terms, an RCA must be established by an employer (or a person related to an employer) in connection with the provision of benefits which may be received or enjoyed on, after or in contemplation of a substantial change in the services rendered by an officer or employee of the employer. The simple creation of a trust of itself would not be sufficient to meet this definition.

Consideration should also be given to the combined effects of paragraphs 56(1)(x) and (z) and subsection 70(2) of the Act as they may apply in such a situation. Assuming no other provisions apply, and that no other amounts are contributed to the former spouse's RCA, if an amount is transferred from one RCA to another, the provisions of paragraphs 56(1)(x) and (z) of the Act provide that any amount withdrawn from the second plan will still be taxable to the husband under the provisions of paragraph 56(1)(x) of the Act during his lifetime as long as he is a resident of Canada. Subject to the application of 70(2) of the Act, amounts received out of the plan by the former spouse will only be included in her income under paragraph 56(1)(z) of the Act subsequent to the death of the taxpayer, or if he ceases to be a resident of Canada. We would not expect this would be the intent of the proposed arrangement.

With respect to the application of subsection 207.6(7) of the Act we are of the opinion that the provision could apply to such a transfer. However, paragraph (a) of the provision states "the amount [transferred] shall not solely because of the transfer (underline added), be included in computing a taxpayer's income under Part I [of the Act]". In our opinion, this provision will permit the inclusion of the amount of the transfer in a taxpayer's income on the basis of factors other than the transfer if it is appropriate in the circumstances to do so. For example, it may be found that the amount is being transferred as consideration for a disposition of some property. If this is the case it might be appropriate to include all or a portion of the amount in the vendor's income. However, a decision of this nature would depend on a complete understanding of the facts relevant to the particular situation.

Situation 2

In this situation an accounting firm has outlined a proposal to establish two RCAs for two shareholder/employees of a corporation. However they are concerned that the amounts contributed under the arrangements by the employees will not be deductible by them under the provisions of paragraph 8(1)(m.2) of the Act. Because of their uncertainty they have asked you to confirm that if the employee contributions are not deductible under paragraph 8(1)(m.2) of the Act that:

1. the custodian would receive a full refund of the amounts remitted as employee contributions pursuant to subparagraphs 164(1)(a) and (b) of the Act as an overpayment of tax [i.e. not as refundable tax pursuant to paragraph 207.7(2) of the Act]; and

2. interest would be paid on the overpayment refund, as provided under subsection 207.7(4) and subparagraph 164(3)(d) of the Act.

Our Comments

We must first note that the letter of August 8, 1999 to which the accounting firm refers, (our file 9919325, a copy of which is enclosed) is an opinion, not an advance income tax ruling. The letter also indicates that the deductibility of any contributions under paragraph 8(1)(m.2) of the Act would be a question of fact which can not be answered without a complete understanding of the facts relevant to the situation described therein. Furthermore, it did not establish any "assessing policy".

In our opinion, the accounting firm should seek an advance income tax ruling should they need confirmation of the deductibility of any contributions to the RCAs. We do not think it would be appropriate to use the provisions of the Act cited above, to provide relief should the amounts not be deductible once they are made. However, it is our opinion that the provisions would not apply in any event. Subparagraph 164(1)(a)(ii) of the Act provides a refund of "overpayments" of any tax payable under the Act (that are not refunded by virtue of subparagraph (i) of the provision).

But in the case described there would be no such overpayment. The proposal is to establish a bone fide RCA and have contributions made to it by the employer and the employee. The fact that the employee's contributions are not deductible would not in itself cause any change in the nature of the RCA and would not result in the creation of an overpayment of the refundable taxes to which paragraphs 164(1)(a), (b) or 164(3)(b) would apply.

P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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