2011 Ruling 2010-0388761R3 - RCA and Credit Facility Agreement

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: Will the posting of collateral under the Credit Facility Agreements constitute a contribution to an RCA for purposes of paragraph 153(1)(p) or Part XI.3 of the Act?

Position: Not in this case.

Reasons: Provision of security is in respect of the overall credit arrangements; it is not specific to the RCAs.

XXXXXXXXXX 						2010-038876

XXXXXXXXXX , 2011

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX and
XXXXXXXXXX

This is in response to your submission of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers (collectively, the "Companies"). We also acknowledge the information provided in your subsequent submissions and during several telephone conversations.

We understand that, to the best of your knowledge and that of the responsible officers of the Companies, none of the issues described herein are:

i) in an earlier tax return of the Companies or a related person;

ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Companies or a related person;

iii) under objection by the Companies or a related person;

iv) the subject of a ruling previously considered by the Income Tax Rulings Directorate of the Canada Revenue Agency ("CRA") in connection with the Companies or a related person, or;

v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

Except as otherwise noted, all statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Definitions

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

a) "XXXXXXXXXX SERP" is defined as set out in 5 below;

b) "XXXXXXXXXX SERP" is defined as set out in 4 below;

c) "Bank" means the XXXXXXXXXX ;

d) "CBCA" means the Canada Business Corporations Act;

e) "Charge" is defined in the Pledge Agreements;

f) "Collateral" is defined as set out in 17 below;

g) "Company" means XXXXXXXXXX ;

h) "Credit Facility" is defined in 15 below;

i) "Default" is defined as set out in 17(iv) below;

j) "Designated Event" is defined as set out in 11 below;

k) "Executives" is defined as set out in 3 below;

l) "Liabilities" are defined in the Pledge Agreements;

m) "XXXXXXXXXX Pledge Agreement" means the Draft Investment Property Pledge Agreement between XXXXXXXXXX and the Bank;

n) "XXXXXXXXXX SERP" means the XXXXXXXXXX Supplemental Retirement Plan for Executive Employees; effective XXXXXXXXXX ;

o) "XXXXXXXXXX Uncommitted Credit Facility Agreement" means the Draft Agreement between XXXXXXXXXX and the Bank;

p) "LOCs" are defined as set out in 6 below;

q) "Old SERPs" means, collectively, the XXXXXXXXXX SERP and the XXXXXXXXXX SERP;

r) "Old Trusts" means the Trusts in respect of the Old SERPs;

s) "Pledge Agreements" means, collectively, the XXXXXXXXXX Pledge Agreement and the XXXXXXXXXX Pledge Agreement;

t) "RCA" means retirement compensation arrangement, as defined in subsection 248(1) of the Act;

u) "Renewal Date" is defined as set out in 10(ii) below;

v) "Security Proposal" is defined as set out in 15 below;

w) "SERPs" means, collectively, the XXXXXXXXXX SERP and the XXXXXXXXXX SERP;

x) "Trust" is defined as set out in 6 below;

y) "Trustee" means XXXXXXXXXX ;

z) "Trusts" means, collectively, the Trust in respect of the XXXXXXXXXX SERP and the Trust in respect of the XXXXXXXXXX SERP;

aa) "Uncommitted Credit Facility Agreements" means, collectively, the XXXXXXXXXX Uncommitted Credit Facility Agreement and the XXXXXXXXXX Uncommitted Credit Facility Agreement;

bb) "XXXXXXXXXX Pledge Agreement" means the Draft Investment Property Pledge Agreement between XXXXXXXXXX and the Bank;

cc) "XXXXXXXXXX SERP" means the XXXXXXXXXX Supplemental Retirement Plan for Executive Employees; effective XXXXXXXXXX ; and

dd) "XXXXXXXXXX Uncommitted Credit Facility Agreement" means the Draft Agreement between XXXXXXXXXX and the Bank.

Our understanding of the Facts and Proposed Transactions is as follows:

Facts

1. XXXXXXXXXX is a public company whose shares are listed on the XXXXXXXXXX . XXXXXXXXXX was incorporated under the CBCA. Its head office is located at XXXXXXXXXX . XXXXXXXXXX is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.

2. XXXXXXXXXX is a public company whose shares are listed on the XXXXXXXXXX . XXXXXXXXXX owns approximately XXXXXXXXXX percent of the outstanding shares of XXXXXXXXXX . XXXXXXXXXX was incorporated under the CBCA. Its head office is located at XXXXXXXXXX . XXXXXXXXXX is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.

3. The Companies have each established supplemental executive retirement plans with respect to certain of their key executives (the "Executives").

4. The 'XXXXXXXXXX Supplemental Executive Retirement Plan' (the "XXXXXXXXXX SERP") was established effective XXXXXXXXXX to provide supplementary retirement benefits to Executives in addition to the amounts which are permitted under the Act to be contributed to the RPPs in which the Executives participate.

5. The 'XXXXXXXXXX Supplemental Executive Retirement Plan' (the "XXXXXXXXXX SERP") was established effective XXXXXXXXXX to provide supplementary retirement benefits to Executives in addition to the amounts which are permitted under the Act to be contributed to the RPPs in which the Executives participate.

6. The future liability with respect to the SERPs is estimated to be approximately $XXXXXXXXXX (approximately $XXXXXXXXXX in respect of the XXXXXXXXXX SERP and approximately $XXXXXXXXXX in respect of the XXXXXXXXXX SERP). The SERPs are currently unfunded but secured by way of separate letters of credit ("LOCs") that are each held in a trust ("Trust") established under the respective plans. Monies are deposited with the Trustee who then pays the applicable fees to obtain the LOCs from a Schedule 1 bank. According to the terms of the SERPs and Trusts, upon the realization of certain Designated Events, the Trustee is required to call on the LOCs to fund the retirement benefits in accordance with procedures and limits specified in the SERPs and Trusts. In the normal course, retirement benefits under the SERPs are not paid from the Trusts, but are rather paid directly by the respective Companies.

7. The CRA has not provided a ruling concerning the SERPs or the Trusts established to fund them, however, in your view, the SERPs together with their respective Trusts constitute RCAs under the Act. Accordingly, the Companies have each remitted refundable tax in an amount equal to the aggregate of deposits made with the Trustees (referred to in 6 above), which in turn equal the aggregate amount of fees paid to obtain and renew the LOCs from time to time.

8. Effective XXXXXXXXXX the Companies terminated the Old SERPs and Old Trusts and thereafter replaced them with the SERPs and Trusts.

9. For the purpose of securing the benefits provided thereunder, the XXXXXXXXXX SERP requires that XXXXXXXXXX establish and maintain a trust fund that shall provide security for the benefits provided under the XXXXXXXXXX SERP. Funding of the benefits is to be provided by the proceeds from a LOC in the event that a Designated Event that requires the Trustee to draw on the LOC occurs.

10. The XXXXXXXXXX SERP requires that the LOC:

i) be issued by a bank in favour of the Trustee for purposes of the XXXXXXXXXX SERP;

ii) expire on or after XXXXXXXXXX of the year following the year in which the LOC is issued (the "Renewal Date");

iii) be unsecured;

iv) permit partial drawings thereunder;

v) be an irrevocable "stand by" letter of credit which obligates the bank to pay on any demand for payment made by the Trustee upon written certification to the bank signed by the Trustee that a Designated Event has occurred;

vi) provide that the bank notify the Trustee XXXXXXXXXX days prior to the expiry of the LOC; and

vii) be incapable of amendment or assignment (other than an amendment or assignment made in connection with a change in the identity of the bank or the Trustee).

11. A "Designated Event" is defined in the XXXXXXXXXX SERP as any of the following events or series of events:

i) the Company fails to make a payment pursuant to the XXXXXXXXXX SERP within XXXXXXXXXX days of the due date specified in the XXXXXXXXXX SERP to the person entitled thereto and such failure has not been rectified (subject to procedures available to the Company to correct the default);

ii) the Company fails to cause the delivery to the Trustee of a renewal or replacement LOC on or before the Renewal Date;

iii) the Company fails to provide the Trustee with an actuarial report on or before the date required in accordance with the terms of the XXXXXXXXXX SERP and the trust;

iv) within XXXXXXXXXX days of the date of a written notice from the Trustee concerning the overdue payment of a benefit under the XXXXXXXXXX SERP, the Company has failed to provide the Trustee with:

a. proof of payment of such benefit;

b. direction to pay such benefit from the assets of the trust fund; or

c. a notice of dispute in accordance with the terms of the XXXXXXXXXX SERP;

v) within XXXXXXXXXX days of the date upon which a decision or agreement which requires that payment of a benefit be made is deemed to be final (and without available review or appeal), the Company has failed to either make such payment or provide the Trustee with a written direction to make such payment from the assets of the trust fund;

vi) a proceeding has been instituted by or against the Company: (i) seeking to adjudicate it as bankrupt or insolvent, or (ii) seeking liquidation, dissolution, winding up, reorganization, arrangement, protection, relief or compromise of it or any of its property or debt under any bankruptcy law or any other applicable law relating to insolvency, or compromise of debts or making a proposal with respect to it under any law relating to bankruptcy, insolvency or compromise of debts or other similar laws (including, without limitation, any application under the Companies' Creditors Arrangement Act (Canada) or any arrangement or compromise of debt under laws of its jurisdiction of incorporation); and

vii) the Company fails to withhold and remit, as required, the refundable tax on any contribution to the trust fund.

12. The terms and requirements of the XXXXXXXXXX SERP are substantially the same as those set out in respect of the XXXXXXXXXX SERP, including the provisions described in 9 to 11 above. XXXXXXXXXX .

13. The Companies applied, on behalf of the Trusts, for new LOCs (the "New LOCs") on substantially the same terms as the LOCs of the Old SERPs (collectively, the "Old LOCs") held by the Old Trusts and in accordance with the above-noted requirements under the SERPs.

14. The Companies have negotiated Uncommitted Credit Facility Agreements and Pledge Agreements with the Bank.

15. The proposed credit arrangements with the Bank consist of the Uncommitted Credit Facility Agreements and the Pledge Agreements. XXXXXXXXXX , these documents are fundamentally identical and set out the terms of a credit facility for general corporate purposes (the "Credit Facility"). It is under the terms of these Uncommitted Credit Facility Agreements that the existing LOCs will continue to be provided to the Trustee as security for the funding obligations under the SERPs (the "Security Proposal").

16. The principal terms and conditions of the Uncommitted Credit Facility Agreements are as follows:

i) XXXXXXXXXX and XXXXXXXXXX will have available to them $XXXXXXXXXX and $XXXXXXXXXX respectively of demand operating credit, which will be available by way of overdrafts, bankers' acceptances, LIBOR loans, LOCs and miscellaneous sub-credits available to subsidiaries;

ii) the purpose of the Credit Facility is for general corporate purposes, including the redemption of the borrowers' short-term promissory notes;

iii) LOCs may not be prepaid, but only cash collateralized;

iv) the Credit Facility may be cancelled by the Bank at any time;

v) in the event that an LOC is outstanding at the date of termination for any reason, then the Companies must provide cash or other instruments acceptable to the Bank in an amount equal to the amount outstanding under the LOC, plus accrued and unpaid interest, to be held by the Bank as collateral for the LOC until maturity;

vi) any amounts drawn under the Credit Facility will be due and payable without demand in the event of the Companies' bankruptcy or seeking creditor protection;

vii) the Companies may elect to pledge collateral to the Bank in an amount equal to the amount of the Credit Facilities;

viii) if the Companies elect to pledge collateral, then upon any failure by the Companies to perform their obligations under the Uncommitted Credit Facility Agreements or any default as defined under the Pledge Agreements, the Bank shall have the right to exercise any rights and remedies against such collateral provided at law or by the Pledge Agreements;

ix) the Companies may only elect to change their Credit Facilities from secured to unsecured or vice versa XXXXXXXXXX per XXXXXXXXXX and must give XXXXXXXXXX days prior written notice to the Bank of any such election; and

x) the Credit Facilities may be prepaid in whole or part upon XXXXXXXXXX days notice, subject to certain conditions.

17. The Pledge Agreements provide the ability for a borrower to pledge specific securities, specific accounts, all investment property and/or bank balances (the "Collateral"). The principal terms and conditions of the Pledge Agreements are as follows:

i) the borrower grants general and continuing collateral security by way of a mortgage, pledge, charge and assignment and grant of a security interest in the Collateral;

ii) the borrower agrees to keep the Collateral free of any charge or trust without the Bank's prior consent;

iii) upon request, the borrower must deliver the Collateral along with any documents requested to enable it to exercise control over the Collateral as required by personal property security legislation;

iv) "Default" is defined as follows:

a. the Companies do not pay any of the Liabilities when due;

b. the fair market value of the Collateral is less than the margin amount in respect of the Liabilities, and the Companies fail to deliver to the Bank security (of a type and quality acceptable to the Bank) as Collateral with sufficient value to rectify such shortfall;

c. the Companies do not observe or perform any of their obligations under the Pledge Agreements or any other agreement or document existing at any time between the Companies and the Bank;

d. any representation, warranty or statement made by or on behalf of the Companies to the Bank is untrue in any material respect at the time when or as of which it was made;

e. the Companies cease or threaten to cease to carry on in the normal course of their business or any material part thereof;

f. there is, in the Bank's reasonable opinion, a change in effective control of the Companies;

g. the Companies become insolvent or bankrupt or make a proposal or file an assignment for the benefit of creditors under the Bankruptcy and Insolvency Act (Canada) or similar legislation in Canada or any other jurisdiction; a petition in bankruptcy is filed against the Companies; or steps are taken under any legislation by or against the Companies seeking their liquidation, winding-up, dissolution or re-organization or any arrangement or composition of their debts;

h. a receiver, trustee, custodian or other similar official is appointed in respect of the Companies or of all or a substantial portion of their property;

i. the holder of a Charge takes or threatens to take possession of all or any part of the Companies' property, or a distress, execution or other similar process is levied against all or any part of such property; or

j. the Bank, in good faith, believes that the prospect of payment or performance of or in relation to the Liabilities is or could be impaired or that the Collateral is or could be placed in jeopardy; and

v) the security interests created by the Pledge Agreements attach to existing Collateral upon execution of the Pledge Agreements and to any Collateral subsequently acquired.

Proposed transactions

18. Collateral will be provided to the Bank as security under the terms of the Uncommitted Credit Facility Agreements and Pledge Agreements. The amount of Collateral that is presently being contemplated is approximately $XXXXXXXXXX for XXXXXXXXXX and $XXXXXXXXXX for XXXXXXXXXX , although the parties may ultimately agree to greater or lesser amounts as Collateral.

19. Under the terms of the Uncommitted Credit Facility Agreements, the Bank will reduce the fees associated with the LOCs.

Purpose of the Proposed Transactions

20. The purpose of the Uncommitted Credit Facility Agreements is to provide credit facilities for the general corporate purposes of the Companies. The Uncommitted Credit Facility Agreements provide the Companies with lower borrowing costs if they provide security.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our ruling is as follows:

A. The posting of Collateral under the Uncommitted Credit Facility Agreements will not constitute a contribution to an RCA under the SERPs for the purposes of paragraph 153(1)(p) or Part XI.3 of the Act.

The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CRA provided that proposed transactions are completed within six months of the date of this letter.

Comments/Caveats

Nothing in this ruling should be construed as confirming, either expressly or implicitly:

1. that the CRA has agreed to or made a determination as to the reasonableness of the benefits provided under the SERPs; or

2. whether the Companies are entitled to a deduction under paragraph 20(1)(r) in respect of amounts deposited with the Trustee, as described in 6 above, and amounts remitted as refundable tax, as described in 7 above.

The determination of reasonableness of benefits provided under a supplemental plan will always be a question of fact. However, the CRA does not view the use of multiple years of service or multiple years of salary rather than actual years of service or actual salary as appropriate.

Paragraph 20(1)(r) of the Act requires, inter alia, that amounts paid by a taxpayer as contributions under an RCA must be in respect of services rendered by an employee or former employee of the taxpayer. It is our view that, all other things being equal, a contribution must be in respect of services rendered to the taxpayer by the employee.

The CRA is of the opinion that if the issuer of a LOC is called upon, as described in 10(v) above, to pay an amount to the Trustee, that amount will not be a contribution to the Trust by either of the Companies but will be a contribution to the Trust by the issuer of the LOC. As a result, the payment made by the issuer would not give rise to a deduction in computing the income of either of the Companies.

Yours truly,

For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch