CRA rules an RCA trust’s refundable Pt. XI.3 tax could be refunded through winding it up and replacing it by a new LC trust

An RCA trust had been set up by Aco to fund pensions to its executives under a SERP. The value of its assets is less than the actuarial value of its liabilities.

The existing RCA trust will sell all its assets and on December 31 will distribute the cash proceeds to Aco (producing an income inclusion under s. 12(1)(n.3).) Consequently, the existing trust will not hold any assets at that year end other than its claim to a refund of the refundable tax, although the SERP will not be terminated.

The following year, a new trust will be settled by Aco, with a view to better securing the benefits payable under the SERP. The only asset of the new trust will be a letter of credit, with Aco contributing the amounts required to pay the LC fees. The payment of the SERP benefits will be made by Aco from its general revenues.

CRA ruled that the existing trust will be able to make the s. 207.5(2) election for the taxation year in which it disposed of all its assets, on the basis that its refundable tax at the end of that taxation year will be nil. In other words, the transactions will generate a complete refund of the existing refundable tax, and the only new refundable tax generated will be based on the quantum of the LC fees.

Neal Armstrong. Summary of 2024 Ruling 2024-1018811R3 F under s. 207.5(2).