2003 Ruling 2003-0042843 - UNFUNDED SUPPLEMNTAL 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.

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

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

Principal Issues: Is the supplemental pension plan an SDA or an RCA?

Position: No

Reasons:

The plan is an unfunded arrangement to provide pension benefits that are supplementary to the benefits provided under the employer's RPP. While funds may be set aside and invested to pay for benefits under the plan, the funds will remain available to the general creditors of the employer.

XXXXXXXXXX 							2003-004284

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Employer") - Account #XXXXXXXXXX

This letter is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We acknowledge receipt of your letters dated XXXXXXXXXX and the information provided in our telephone conversation (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the Employer, none of the issues involved in the ruling request is:

(i) in an earlier return of the Employer or a related person;

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

(iii) under objection by the Employer or a related person;

(iv) before the courts; nor,

(v) the subject of a ruling previously issued by the Directorate.

In this ruling, unless otherwise indicated, all statute references are to the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act") and the Income Tax Regulations (the "Regulations").

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

Facts

1. The Employer is a member of the XXXXXXXXXX ("Association"). The Association is a society formed under the laws of the province of XXXXXXXXXX. The Employer and the Association are exempt from federal income taxes.

2. The Employer files its tax returns with the XXXXXXXXXX Taxation Centre.

3. The Association is introducing a supplemental employee retirement plan ("SERP"), entitled "XXXXXXXXXX" (the "Plan"), for public sector employers that are concurrently Association members and participants in the Association's registered defined benefit pension plan named XXXXXXXXXX (CCRA registration # XXXXXXXXXX) (the "DBPP"). The DBPP supplements the XXXXXXXXXX Pension Plan ("XXXXXXXXXX PP"), a plan registered under the XXXXXXXXXX, by enhancing the employees' pension benefits to a XXXXXXXXXX% formula but subject to the maximum pension limits under the Act. The Plan is intended to supplement the DBPP and the XXXXXXXXXX PP.

4. The Association's role, with respect to the Plan includes:

a) the preparation and dissemination of plan documents and communication materials, and

b) provision of administration services to participating XXXXXXXXXX employers.

5. The Plan provides benefits in excess of the maximum pension limits permitted under the Act plus an enhancement of the XXXXXXXXXX PP normal form. A XXXXXXXXXX's adoption of the Plan is entirely optional. Where a XXXXXXXXXX adopts the Plan, the XXXXXXXXXX does not become a participating employer under the Plan, rather the XXXXXXXXXX will have its own SERP, the Plan.

6. The Plan is an unfunded arrangement. An Association-appointed actuary will periodically provide each XXXXXXXXXX that has adopted the Plan with a report on the XXXXXXXXXX's pension liabilities and costs.

7. A summary of the Plan terms follows:

a) Eligibility:

Employees designated by the employer to be a member of the Plan.

b) Contributions:

No member shall contribute to the Plan nor shall there be any employer pre-funding.

c) Pension Benefit at Normal Retirement:

If retirement occurs at age XXXXXXXXXX or where age plus credited service is equal to at least XXXXXXXXXX ("Rule of XXXXXXXXXX"), an unreduced annual pension is payable equal to:

XXXXXXXXXX % of the member's average best XXXXXXXXXX consecutive years' earnings times credited service commencing XXXXXXXXXX, payable in the normal form,

plus

for eligible pensionable service during the period XXXXXXXXXX through XXXXXXXXXX (maximum XXXXXXXXXX years)

XXXXXXXXXX% of the member's average best XXXXXXXXXX years' earnings up to the average of the years maximum pensionable earnings for the year of retirement and the preceding four years,

plus

XXXXXXXXXX % of the member's excess average best XXXXXXXXXX years earnings

payable under the normal form

less

the member's DBPP and XXXXXXXXXX PP pensions based on the normal form.

d) Early Retirement:

Upon attainment of age XXXXXXXXXX, the member's accrued pension is reduced by XXXXXXXXXX% times the lesser of:

the number of years by which the "rule of XXXXXXXXXX" exceeds the member's age and credited service, and

the number of years by which the member's retirement age precedes age XXXXXXXXXX.

e) Normal Form of Pension:

The Plan normal form is identical to the DBPP normal form:

for a member with a spouse at retirement, a joint and survivorship XXXXXXXXXX% form

for a member without a spouse at retirement, a life annuity guaranteed for ten years.

f) Death Before Retirement:

A member's spouse is entitled to receive the commuted value of the member's accrued pension, or an immediate or deferred pension provided by such commuted value.

A non-spousal beneficiary is entitled to receive the commuted value of the member's accrued pension.

g) Death After Retirement:

In the event of a member's death after retirement, the death benefit will depend upon the pension option selected.

h) Termination Before Retirement:

Vesting occurs with XXXXXXXXXX or more years of Plan pensionable service.

The vested member is entitled to elect either:

a commuted value of his/her accrued pension, or

deferred pension commencing at any age between age XXXXXXXXXX and XXXXXXXXXX.

i) Indexing After Retirement:

The pension payable after retirement will be increased annually at a rate equal to XXXXXXXXXX% of the increase in the XXXXXXXXXX Consumer Price Index (CPI). In no case will the pension payable be reduced.

Proposed Transactions

8. The proposed transaction is to establish a SERP, the Plan, for the Employer. The Plan is effectively a top-up plan which will be administered by the Association to provide to those employees designated by the Employer a pension benefit based on their best XXXXXXXXXX consecutive years' earnings without regard to maximum pension limits.

9. The Employer is adopting the Plan for some of its management employees. While the Plan is unfunded, the Employer would set aside and invest sums of money equal to its Plan liabilities. Such earmarked assets will continue to belong to the Employer and will not be held for the benefit of the Plan members. Thus, the members of the Plan will have no direct claims against these assets, and such earmarked assets will remain available to the general creditors of the Employer. The Plan benefits will be paid from the Employer's general assets as they fall due. The amount of earmarked assets will be increased/decreased depending on the Employer's liabilities as determined by the actuarial valuations and at the Employer's discretion.

10. It is the Employer's intention that some or all of the earmarked assets will be invested in pooled funds managed by XXXXXXXXXX (or another financial institution) as part of an investment program for which the Association would be responsible for governance.

Purpose of the Proposed Transactions

11. The purpose of the proposed transactions is to provide members of the Plan with retirement benefits that are not limited by the maximum pension limits under the Act.

Rulings

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 that the proposed transactions are as described above, we rule as follows:

A. The Plan will not constitute a salary deferral arrangement as that term is defined in subsection 248(1) of the Act.

B. The Plan will not constitute a retirement compensation arrangement as that term is defined in subsection 248(1) of the Act.

C. Every payment made by the Employer to a member or his or her beneficiary, as the case may be, under the terms of the Plan, will be included in the income of the recipient in the year it is received as a superannuation or pension benefit pursuant to subparagraph 56(1)(a)(i) of the Act.

D. No amount will be included in the income of a member under subsection 5(1) of the Act or paragraph 6(1)(a) of the Act as a result of, in and by itself, the member's participation in the Plan.

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 Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate