17 December 2010 External T.I. 2009-0338841E5 - Characterization of Income from an RCA

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.

Principal Issues: Whether an amount included into income pursuant to paragraph 12(1)(n.3) would be characterized as business income?

Position: Yes.

Reasons: Wording of the Act.

XXXXXXXXXX
2009-033884
P. Tsang

December 17, 2010

Dear XXXXXXXXXX:

Re: Income from a retirement compensation arrangement ("RCA")

This is in response to your correspondence of August 25, 2009, wherein you requested our comments on amounts included in an employer's income pursuant to paragraph 12(1)(n.3) of the Income Tax Act (the "Act").

Specifically, your letter detailed a situation where an employer had established an RCA to provide retirement benefits to its employees. The employer had made contributions to the RCA trust and deducted those contributions from business income pursuant to paragraph 20(1)(r) of the Act. The RCA is now being wound-up. The RCA trust agreement stipulates that any surplus funds remaining in the RCA trust on windup will be returned to the employer. You indicate that the employer will include the amount received from the RCA in its income pursuant to paragraph 12(1)(n.3). However, because the preamble of subsection 12(1) states that the types of income described in the subsection may be income from a business or property, it is not entirely clear whether RCA income described in paragraph 12(1)(n.3) would be income from a business or property. You have asked for clarification on the proper characterization of such income.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to offer the following general comments which may be of assistance.

Paragraph 12(1)(n.3) of the Act provides that there shall be included in computing the income of a taxpayer all amounts received by the taxpayer in the course of a business out of or under an RCA to which the taxpayer has contributed an amount that was deductible under paragraph 20(1)(r) of the Act in computing the taxpayer's income.

Since one of the conditions for an amount to be included in a taxpayer's income pursuant to paragraph 12(1)(n.3) is that the amount be received by the taxpayer in the course of a business, it is our view that such income would be characterized as business income. We would, however, note that it is a question of fact whether surplus funds returned to an employer out of an RCA would be considered to be received by the employer in the course of its business. If it were determined that the amount was not received in the course of a business, the amount would nonetheless be included in income pursuant to subsection 56(1) of the Act.

We trust the above comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CA
for Director
Deferred Compensation Arrangements and Retirement Plans Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch