30 November 1995 Ruling 9606503 - LETTER OF CREDIT, 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Funding an RCA with a letter of credit that reduces the employer's line of credit which is secured by future revenue streams.

Position:

The contribution to the RCA is twice the fee payable for the letter of credit; the security will not constitute a contribution to the RCA.

Reasons:

This ruling given previously; security would be difficult to value (if it has any value at all in this situation).

XXXXXXXXXX							960650

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced organization. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

Our understanding of the facts and proposed transactions is as follows:

Facts

XXXXXXXXXX is a corporation incorporated under the provisions of Part II of the Canada Corporations Act (Canada). XXXXXXXXXX address is as follows:

XXXXXXXXXX

XXXXXXXXXX

Proposed Transactions

XXXXXXXXXX

will establish a pension plan and a supplementary retirement plan (the "Plan") to provide the required benefits to the Employees.

The pension plan will be registered in accordance with subsection 147.1(2) of the Income Tax Act (the "Act").

Under the terms of the Plan, XXXXXXXXXX will make contributions to an arm's length custodian (the "Custodian") in order to provide the Employees with the following benefits:

the payment of any excess annual retirement benefit accruals over the maximum accruals permitted by the registered pension plan under the Act;

the payment of involuntary retirement benefits XXXXXXXXXX.

the payment of the excess of death benefits to which spousal or non-spousal beneficiaries would otherwise be entitled over the benefits provided in the registered pension plan;

the payment of an immediate pension to

XXXXXXXXXX

and

payment of any pension benefits with respect to any approved leave of absence without pay which extends beyond the limit defined in the Act and which are permitted under XXXXXXXXXX.

XXXXXXXXXX will contribute cash to the Custodian equal to two times the fee charged by a financial institution to issue a letter of credit (the "Letter of Credit") in the amount of the potential obligations under the Plan. The Custodian will arrange for the issue of the Letter of Credit.

In the operation of its business, XXXXXXXXXX will have authorized credit arranged with a financial institution. The contingent obligations under the Letter of Credit will be included in its authorized credit. XXXXXXXXXX will directly provide security for any amounts advanced under its authorized credit, including any calls on the Letter of Credit arranged by the Custodian, by a general charge on its revenue streams.

The contribution described in paragraph 6 above will be made

XXXXXXXXXX

in order to maintain the Letter of Credit. The charge on revenue streams described in paragraph 7 above will continue in order to maintain the authorized credit, including the Letter of Credit.

Purpose of the Proposed Transactions

The purpose of the Plan is to provide benefits to the Employees

XXXXXXXXXX

The purpose of the Letter of Credit is to limit XXXXXXXXXX cash flow obligations with respect to the Plan until such time as distributions are required to be made to the Employees.

Additional Information

To the best of your knowledge and the knowledge of XXXXXXXXXX none of the issues involved in this ruling request is being considered by a tax services office or taxation centre in connection with an income tax return already filed, and none of the issues is under objection or appeal.

Rulings Given

Provided that the statement of facts and proposed transactions are correct and constitute a complete disclosure of all the relevant facts and proposed transactions, and that the proposed transactions are completed in the manner described herein, our rulings are as follows:

Provided that the only benefits paid to the Employees under the Plan are as described in paragraph 5 above, the Plan will be a "retirement compensation arrangement" as that term is defined in subsection 248(1) of the Act.

The contributions to the Plan, as described in paragraph 6 above, will be included in the determination of the Plan's "refundable tax" as defined in subsection 207.5(1) of the Act. No amount will be included in the computation of the Plan's refundable tax with respect to the security described in paragraph 7 above.

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 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, and are binding on Revenue Canada, Customs, Excise, and Taxation provided that the proposed transactions are completed within XXXXXXXXXX.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch