2009 Ruling 2007-0220151R3 - funded pension plan

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: Is the proposed plan an Employee Benefit Plan?

Position: Yes

Reasons: The Plan is not an RCA and there are no resident's contributions being made to it at the present time.

XXXXXXXXXX 								2007-022015

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in respect of your request for an advance income tax ruling on behalf of the above noted-taxpayers. We also acknowledge the information provided in your electronic correspondence.

This letter is based solely on the facts and proposed transactions described below. Any documentation submitted in respect of your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Definitions

1. All terms used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.

Unless otherwise stated the following terms and expressions have the meanings specified below:

(a) "Act" means: the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;

(b) "Beneficiary" means: with respect to a Plan Member, the person designated as the Plan Member's beneficiary in a manner acceptable to the Company;

(c) "Company" means: XXXXXXXXXX . which has the business Number XXXXXXXXXX and files its tax returns through the XXXXXXXXXX Tax Services office and the XXXXXXXXXX Taxation Centre. The Company's address is XXXXXXXXXX ;

(d) "Company's Liability" means: as of a particular date, the aggregate value of:

(i) all of the Notional Accounts under the Plan;

(ii) a reasonable estimate of the total Notional Employer Contributions which are expected to be credited to the Notional Accounts from such date to the expiry date of the current Letter of Credit; and

(iii) a reasonable estimate of the total of the Notional Investment Earnings which are expected to be credited to the Notional Accounts from such date to the expiry date of the current Letter of Credit,
less the value of all assets of the Trust, other than any letters of credit held by the Trust at such date;

(e) "Continuous Service" means:

(i) for DC Members, "continuous service" as that term is defined in the Company's Registered Pension Plan; and

(ii) for TCN Members, unbroken service of a TCN Member from the TCN Member's most recent date of hire by an Employer up to the earlier of the date of termination of the Plan or the TCN Member's date of retirement, termination of employment or death, including any unbroken period of service immediately prior to becoming an Employee from the TCN Member's date of hire by a subsidiary, affiliated or associated company of the Employer up to the date of transfer of the TCN Member to the Employer. Continuous Service of a TCN Member includes any periods of temporary absence or lay-off not exceeding 52 weeks in length except where an actual cessation of employment has occurred. Continuous service shall not be broken if a TCN Member transfers from one Employer to another.

(f) "CRA" means: the Canada Revenue Agency;

(g) "DC Member" means: an Employee who has been designated by the Company to participate in the Plan who has accrued benefits on a money purchase basis in the Registered Pension Plan;

(h) "Earnings" means: a Plan Member's annual base salary, excluding all other compensation such as bonuses, incentive compensation, and compensation for overtime, except that Earnings includes any award received by a Plan Member in the Plan Year under an Employer's variable compensation program.

For the purposes of the Plan, the Company shall convert Earnings received in a currency other than the lawful currency of Canada into the lawful currency of Canada using an appropriate methodology selected by the Company and used consistently from year to year;

(i) "Effective Date" means: the date as of which the Initial Letter of Credit is to be issued;

(j) "Employee" means: a person who is employed by an Employer;

(k) "Employer" means: the Company or a company that is affiliated or associated with the Company that is designated by the President or any XXXXXXXXXX Directors of the Company, as an Employer, provided such company adopts the Plan and agrees to make the Notional Employer Contributions required under the Plan in respect of its Employees;

(l) "Event of Default" means: an occurrence of an event, as specified in the Trust Agreement, which requires the Trustee to demand payment under a letter of credit;

(m) "Initial Letter of Credit" means: a Letter of Credit as described in 29 below;

(n) "Investment Options" means: the notional investment options described in 10 below;

(o) "Notional Account" means: an account described in 7 below;

(p) "Notional Employer
Contributions" means: notional contributions as described in 7, 8 and 23 below, as applicable, that are made to a Plan Member's Notional Account by the Plan Member's Employer;

(q) "Notional Investment
Earnings" means: the notional amount of investment income credited to a Plan Member's Notional Account pursuant to the provisions described in 7 below;

(r) "Plan" means: before the proposed transactions, the "XXXXXXXXXX ", sponsored and maintained by the Company, as described in 3 through 18 below, and after the proposed transactions, the "XXXXXXXXXX " as described in 3 through 18 and 19 through 27 below;

(s) "Plan Member" means a DC Member or a TCN Member, as applicable.

(t) "Plan Year" means: the calendar year;

(u) "Registered Pension Plan"
means: the Pension Plan for the Employees of XXXXXXXXXX and Participating Associated Companies, as amended from time to time;

(v) "Regulations" means: the Income Tax Regulations, Consolidated Regulations of Canada, Chapter 945, as amended to the date hereof.

(w) "TCN Member" means: an Employee who is a Third Country National who has been designated by the Company to participate in the Plan who is not accruing benefits under any other retirement plan sponsored by the Company or an associated company.

(x) "Third Country National"
means a permanent Employee who is hired to work on international assignments at various locations outside Canada.

(y) "Trust" means: the trust described in 28 below;

(z) "Trust Agreement" means: the agreement that the Company will enter into with the Trustee in accordance with 28 below; and

(aa) "Trustee" means: the corporate trust company resident in Canada which is appointed as trustee of the Trust pursuant to the terms of the Trust Agreement;

Facts

3. The Company established the Plan prior to XXXXXXXXXX with effect from XXXXXXXXXX . The Plan has been maintained as an unfunded pension plan since its inception.

4. The purpose of the Plan is to provide pension benefits that would normally be provided to Employees under a money purchase provision of the Registered Pension Plan were it not for the limitations imposed on the recognition of foreign service as eligible service under subparagraph 8503(3)(a)(vii) of the Regulations and Registered Plans Directorate Newsletters No. 00-1 and No. 93-2.

5. An Employee who is a member of the Registered Pension Plan is eligible to become a DC Member of the Plan if:

(i) the Employee is prohibited from accruing further benefits under the Registered Pension Plan by the application of the limitations imposed on foreign service by subparagraph 8503(3)(a)(vii) of the Regulations and Registered Plans Directorate Division Newsletters No. 00-1 and No. 93-2;

(ii) the Employee is not accruing benefits under another pension plan sponsored by the Company or an associated company; and

(iii) the Company designates the Employee to be a DC Member of the Plan.

6. Currently, all DC Members of the Plan are Employees of the Company or another Employer.

7. The Company maintains a Notional Account for each DC Member. Each Notional Account is notionally credited with:

(i) Notional Employer Contributions which are determined in accordance with 8 below; and

(ii) Notional Investment Earnings in the amounts and at the times determined in accordance with 11 below.

8. The Notional Account of each DC Member is credited XXXXXXXXXX with a Notional Employer Contribution that is equal to XXXXXXXXXX of the DC Member's Earnings, multiplied by the applicable percentage set out in the following schedule, based on the DC Member's Continuous Service at the time of the Notional Employer Contribution:

Continuous Service	Notional Company Contribution
XXXXXXXXXX	XXXXXXXXXXX

A Notional Employer Contribution is only determined in respect of services rendered outside of Canada by the DC Member to the DC Member's Employer where the DC Member:

(i) is regularly employed in a country other than Canada; and

(ii) is not resident in Canada at the time the services are rendered.

For greater certainty, each Notional Employer Contribution for a DC Member in a calendar year is equal to the amount that would be contributed to the Registered Pension Plan in respect of the DC Member but for:

(i) the restrictions described in 5 above, and

(ii) the money purchase limit for the calendar year in which the contribution would otherwise be made;

less the amount that may be contributed to the Registered Pension Plan in respect of the DC Member.

9. Currently, there are XXXXXXXXXX DC Members in respect of whom Notional Employer Contributions under the Plan, have been made. Of these DC Members, XXXXXXXXXX continue to have Notional Employer Contributions made on their behalf while XXXXXXXXXX have re-established their Canadian residency.

10. The Plan provides the same selection of notional investment options as are offered under the Registered Pension Plan (the "Investment Options"), for notional amounts accumulated in each DC Member's Notional Account. A DC Member's Notional Account is notionally invested in the Investment Options selected by the DC Member. Each DC Member may change his or her Investment Options in respect of future Notional Employer Contributions or may issue instructions to have existing Investment Options replaced with other Investment Options at such times, upon such conditions, and in such form and manner as is determined by the Company from time to time.

11. Notional Investment Earnings are periodically credited to a DC Member's Notional Account, the frequency of which is determined by the Company in its sole discretion but not less frequently than annually. For this purpose, the Notional Investment Earnings for a period to be credited to a DC Member's Notional Account on the particular Investment Options selected by the DC Member as described in 10 above is determined by the Company using the rate of return (positive or negative) earned by the fund governed by the Registered Pension Plan during the same period, on the investment earnings (including dividends and interest received, accrued investment income, and realized and unrealized capital gains and losses) of the Registered Pension Plan for the same Investment Options net of any applicable expenses incurred by the fund governed by Registered Pension Plan that are reflected in the unit price of the applicable investment option (e.g. the operating expenses of the particular mutual or pooled fund).

For greater certainty, the Notional Investment Earnings on the particular Investment Options that are credited to a DC Member's Account will be equal to the amount that would have been credited to the DC Member's Account under the terms of the Registered Pension Plan had the DC member held the same Investment Options under the Registered Pension Plan.

12. A DC Member continues to be a member in the Plan in the event the DC Member is no longer prohibited from accruing benefits under the Registered Pension Plan by the application of the limitations imposed on foreign service by subparagraph 8503(3)(a)(vii) of the Regulations and Registered Directorate Division Newsletters No. 00-1 and No. 93-2, and the DC Member becomes entitled to resume accruing benefits under the Registered Pension Plan. However, no further Notional Employer Contributions are made to the Plan on behalf of the DC Member unless the DC Member becomes affected, at a subsequent date, by the limitations imposed on foreign service by subparagraph 8503(3)(a)(vii) of the Regulations and Registered Plans Division Newsletters No. 00-1 and No. 93-2.

13. Notional Investment Earnings continue to be credited to a DC Member's Notional Account in accordance with 11 above after the DC Member becomes entitled to resume accruing benefits under the Registered Pension Plan and is no longer being credited with Notional Employer Contributions under the Plan, until such time as the DC Member or his or her beneficiary, as applicable, is entitled to receive benefits under the terms of the Plan.

14. Currently, there are XXXXXXXXXX DC Members who are employed by the Company who have re-established residency in Canada and have resumed accruing benefits under the Registered Pension Plan. Since the date that these XXXXXXXXXX DC Members resumed benefit accruals under the Registered Pension Plan, their Notional Accounts have continued to be credited with Notional Investment Earnings but not with Notional Employer Contributions.

15. Upon the earlier of a DC Member's retirement or termination of employment, other than by death or transfer to employment with another Employer, the DC Member is entitled to receive a lump sum payment in an amount equal to the value of the DC Member's Notional Account as at that time.

16. In the event of the death of a DC Member prior to receipt of the DC Member's benefit payments, the value of the Member's Notional Account is payable, in a lump sum, to the DC Member's Beneficiary.

17. Benefits paid under the Plan to a particular DC Member are paid by the DC Member's applicable Employer at the time the benefits are payable.

18. Neither the Company, an Employer or any other person holds property specifically for the purpose of providing any benefits payable under the Plan.

Proposed Transactions

19. The Plan will be amended in order to add TCN Members as a new class of members eligible to participate in the Plan. The purpose of the Plan will be revised to include the provision of retirement benefits to Third Country Nationals who are not accruing benefits under another retirement plan sponsored by the Company or an associated company. The only changes being made to the terms of the Plan which are relevant to this ruling are described in paragraphs 20 to 27 below.

20. An Employee who is a Third Country National will be eligible to become a TCN Member if:

(i) the Employee is not accruing benefits under any other retirement plan sponsored by the Company or an associated company; and

(ii) the Company designates the Employee to be a TCN Member of the Plan.

21. In certain circumstances, a TCN Member may be required to render services in Canada to the Company or an associated company on a temporary basis or may be required to render services to the Company and/or while resident in Canada. However, Notional Employer Contributions to the Plan will be made in respect of such services in Canada by a TCN Member or in respect of such services by a TCN Member while resident in Canada only if the following conditions are satisfied:

(i) the TCN Member was a non-resident of Canada for purposes of the Act immediately prior to commencing to provide such services; and

(ii) the period during which the TCN Member renders such services does not exceed 60 months.

22. Notwithstanding 21 above, Notional Employer Contributions to the Plan shall cease in respect of such a TCN Member effective upon the earlier of

(i) the expiry of the 60 month period referred to in 21(ii) above; and

(ii) the date on which the TCN Member commences participation in the Registered Pension Plan;

and in no circumstances shall Notional Employer Contributions to the Plan recommence in respect of such TCN Member unless and until the individual has been a non-resident of Canada for purposes of the Act for more than 12 months immediately preceding the date on which Notional Employer Contributions to the Plan recommence in respect of such individual and the individual satisfies all other eligibility requirements under the Plan.

23. Except as provided by 21 and 22 above, The Notional Account of each TCN Member will be credited XXXXXXXXXX with a Notional Employer Contribution that is equal to XXXXXXXXXX of the TCN Member's Earnings multiplied by the applicable percentage set out in the following schedule, based on the TCN Member's Continuous Service at the time of the Notional Employer Contribution:

Continuous Service	Notional Company Contribution
XXXXXXXXXX	XXXXXXXXXXX

In addition, the Company may, at any time and at its sole discretion, credit an additional Notional Employer Contribution to the Notional Account of a TCN Member.

A Notional Employer Contribution in respect of a TCN Member will, in all or substantially all cases, be determined in respect of services rendered outside of Canada by the TCN Member to the TCN Member's Employer where the TCN Member:

(i) is regularly employed in a country other than Canada; and

(ii) is not resident in Canada at the time services are rendered.

24. A TCN Member will continue to be a member of the Plan in the event that the TCN Member becomes entitled to accrue benefits under another retirement plan sponsored by the Company or an associated company. However, no further Notional Employer Contributions will be made to the Plan on behalf of the TCN Member unless the TCN Member subsequently becomes ineligible to participate in such other retirement plan.

25. Notional Investment Earnings will continue to be credited to a TCN Member's Notional Account in accordance with paragraph 11 above after the TCN Member becomes entitled to accrue benefits under another retirement plan sponsored by the Company or an associated company and is no longer being credited with Notional Employer Contributions under the Plan, until such time as the TCN Member or his or her beneficiary, as applicable, is entitled to receive benefits under the terms of the Plan.

26. As a result of the addition of TCN Members under the Plan, it is expected that there will initially be a total of XXXXXXXXXX Plan Members, XXXXXXXXXX of whom will be non-residents. Of the other XXXXXXXXXX Plan Members, it is expected that there will initially be XXXXXXXXXX DC Members who have re-established their Canadian residency and XXXXXXXXXX who will be a TCN Member who has temporarily been assigned to work in Canada pending commencement of his next foreign work assignment and who was not resident in Canada prior to this temporary assignment.

27. The facts set out in paragraphs 6, 7, 10, 11, 15, 16, 17 and 18 apply with respect to the TCN Members.

28. Following the receipt of this advance income tax ruling, the Company shall enter into the Trust Agreement with the Trustee to:

(i) provide for the appointment of the Trustee; and

(ii) establish the Trust for purposes of the Plan.

29. Prior to the Effective Date, the Company will make a contribution to the Trust and the Trustee will apply the contribution to purchase the Initial Letter of Credit from a financial institution. The amount of the Initial Letter of Credit shall not be less than the Company's Liability as of the Effective Date. The Company will on a particular date as required from time to time, pay to the Trustee additional contributions, the amount of which shall not be less than the amount of any applicable fee payable for a letter of credit in an amount equal to the Company's Liability as of the particular date.

30. The Company may, in its sole discretion, at any time and from time to time, make contributions to the Trust that are in addition to the contributions described in 29 above. The Company shall direct the investment of the Trust funds or may authorize an investment manager to direct the investment of all or any part of the Trust funds in accordance with the Trust Agreement.

31. Upon the occurrence of an Event of Default, the Trustee will demand payment under the applicable letter of credit in accordance with the terms of the Trust Agreement.

32. The Plan text will be amended to provide for the proposals described in 19 through 27 above.

33. The benefits payable under the Plan in respect of a Plan Member shall be paid by the applicable Employer of the Plan Member out of its general revenues. However, in the Company's sole discretion, all or part of the benefits may be paid from the Trust.

34. As described in 9 and 14 above there are currently XXXXXXXXXX DC Members of whom XXXXXXXXXX are residents of Canada. Currently the non-resident DC Members are entitled to more than 50% of the current value of the benefits that are to be provided under the Plan. As indicated in paragraph 26 above, following the amendments to the Plan described in paragraph 19 above, it is expected that there will initially be a total of XXXXXXXXXX Plan Members, XXXXXXXXXX of whom will be non-residents, and that the non-resident Plan Members will be entitled to more than 50% of the value of the benefits that are to be provided under the Plan. It is anticipated that the non-resident Plan Members will continue to be entitled at all times to more than 50% of the value of the benefits that are to be provided under the Plan.

Purpose of Proposed Transactions

35. The purpose of the Trust is to secure the payments required to be provided to Plan Members under the Plan with one or more letters of credit.

Additional Information

36. To the best of your knowledge and that of the parties identified above, none of the issues raised in this ruling request are

(a) in an earlier return of any of the parties or a related person,

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the parties or a related person,

(c) under objection by any of the parties or a related person,

(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired, or

(e) the subject of a ruling previously issued to any of the parties or a related person by the Income Tax Rulings Directorate of the Canada Revenue Agency.

Rulings

Provided that:

(i) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed transactions, and the purpose of the proposed transactions,

(ii) the transactions are completed as proposed and are legally effective

(iii) at all times the non-resident Plan Members are entitled to more than 50% of the value of the benefits that are to be provided under the Plan and more than 50% of the Plan Members are non-residents, such that, at all times, the arrangement is primarily for the benefit of Plan Members that are non-residents of Canada who rendered their services outside of Canada,

(iv) all contributions made to the Trust in respect of DC Members are in respect of services rendered outside of Canada by DC Members who are non-residents of Canada at the time such services are rendered, and

(v) all or substantially all contributions made to the Trust in respect of TCN Members are in respect of services rendered outside of Canada by TCN Members who are non-residents of Canada at the time such services are rendered,

we rule as follows:

A. The Trust established under the Trust Agreement will not be a retirement compensation arrangement as defined in subsection 248(1) of the Act by virtue of paragraph (l) of the definition of a retirement compensation arrangement;

B. No part of any contribution paid to the Trust as described in 29 and 30 above, will be "resident's contribution" pursuant to subsection 207.6(5.1) of the Act;

C. Upon the establishment of the Trust, the Plan will become an Employee Benefit Plan as defined in subsection 248(1) of the Act.

D. Subject to paragraph 18(10)(a), paragraph 18(1)(a) and section 67 of the Act, subsection 9(1) of the Act will apply to allow the Company to deduct an amount paid to the Trust by the Company in respect to a particular Plan Member, as described in 29 and 30 above, in the taxation year in which the Company pays the amount,

(i) to the extent the amount is made with respect to the services provided to the Company by the Plan Member who was an employee of the Company while the Plan Member was a non-resident of Canada and was regularly employed outside of Canada by the Company at the time the services were provided and
(ii) (ii) the payment is made when the Plan member is not a resident of Canada.

The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided that the proposed Plan is implemented by XXXXXXXXXX

Comments

Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of any other tax consequences relating to the Facts, Proposed Transaction or any transaction or event taking place either prior to the implementation of the proposed transaction or subsequent to the implementation of the proposed transaction, whether described in this letter or not, other than those specifically described in the rulings given above.

The CRA is of the opinion that if the issuer of a letter of credit is called upon as described in 31 above, to pay an amount thereunder to the Trust, that amount will not be a contribution to the Trust by an Employer but will be a contribution to the Trust by the issuer of the letter of credit. As a result, the payment made by the issuer cannot give rise to a deduction in computing an Employer's income.

Yours truly,

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