3 November 1989 Income Tax Severed Letter AC58683 - Retirement Compensation Arrangement - Calculation of Refundable Tax

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.

19(1)                                   M. Shea-DesRosiers
                                        (613) 957-8953

November 3, 1989

Dear Sirs:

This is in reply to your letter of September 13, 1989 concerning the calculation of the refundable tax for purposes of Retirement compensation Arrangements ("RCA").

As noted in Information Circular 70-6R, we do not provide written opinions on proposed transactions other than as a reply to an advance income tax ruling request. We are, however, prepared to offer the following general comments.

Subsection 217.6(2) of the Income Tax Act (the "Act"), as you are aware, provides certain rules when life insurance policies are acquired by an employer to fund retirement benefits. These rule, in part, provide:

(a) that the employer is the custodian of an RCA, and

(b)       that the interest in the insurance is a subject
          property of the RCA.

Subsection 207.6(1) of the Act also has application in these circumstances. Said subsection provides that:

(a)       an inter vivos trust is deemed to be created on the day
          the arrangement is established,

(b)       the employer's interest in the insurance is deemed to
          be a property of the trust and

(c) the employer is deemed to be the trustee of the trust.

Although this deemed trust is not subject to Part I tax by virtue of paragraph 149(1)(q.1) of the Act, it is subject to the 50% refundable tax calculated under Part XI.3 of the Act. For this purpose, the trust's income includes the full amount of its capital gains and losses but does not include the paragraph 82(1)(b) gross up of dividends received by the trust.

The effect of paragraph 207.6(2)(c) of the Act is that it entitles the employer to a tax deduction equal to the deemed contribution which is defined as two times the premium paid. Since 50% of this deemed contribution must be withheld and remitted to the Department, the ultimate effect is that the employer receives a deduction equal to the premium plus the required withholding.

With reference to "exempt" and "non-exempt" policies and their treatment, the provisions of section 12.2 of the Act provide rules specific to the determination of insurance income. In general under subsection 12.2(1) of the Act growth of an exempt policy's accumulating income is excluded from income.

With respect to payments out of or in respect of an insurance policy, the RCA provisions do not differentiate as to whether a policy is exempt or not. All payments out of an arrangement would be included in income of the recipient as income from an RCA.

With respect to the various responsibilities of an RCA custodian, and to the calculations of Part XI.3 refundable tax, the Department has published a Retirement Compensation Guide which provides detailed explanations and examples. A copy of this guide may be obtained through your local district Taxation Office.

The above comments are of a general nature only and are not binding on the Department. We have not examined the printout entitled "Masterplan & Your Retirement with a RCA" which was attached to your letter and make no comments as to whether its illustration of the operation of the refundable tax account is accurate.

We trust the above comments will be of assistance to you.

Yours truly,

for Director Financial Industries Division Rulings Directorate