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: Is the supplemental retirement arrangement (unfunded pension plan) an SDA or an RCA?
Position: No.
Reasons: It is an unfunded arrangement to provide pension benefits that are supplementary to the benefits provided under an RPP.
XXXXXXXXXX 2001-008611
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Proposed Supplemental Pension Plan
This is in reply to your letters of XXXXXXXXXX, in relation to your request for an advance income tax ruling in respect of the above-noted plan.
Definitions and Abbreviations
In this letter, the following terms have the meanings specified:
(a) "Act" means: the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;
(b) "CCRA" means: the Canada Customs and Revenue Agency;
(c) "Employer" means: XXXXXXXXXX;
(d) "Member(s)" means: employees of the Employer who are members of the RPP and the Plan;
(e) "Plan" means: the proposed supplemental pension plan as described in this ruling;
(f) "Regulations" means: the Income Tax Regulations;
(g) "RPP" means: the Pension Plan of the Employer registered as Number XXXXXXXXXX under the Act and as plan number XXXXXXXXXX under the XXXXXXXXXX Pension Benefits Standards Act; and
(h) "Superintendent" means: the Superintendent of Pensions for XXXXXXXXXX.
Facts
1. The Employer has established and is maintaining the RPP for its employees. The RPP is a defined contribution pension plan.
2. A Member's annual contributions to the RPP are set out in the RPP and are XXXXXXXXXX% of the Member's "Earnings" as that term is defined in the RPP up to the yearly maximum pensionable earnings ("YMPE") and XXXXXXXXXX% of Earnings in excess of the YMPE.
3. The Employer's annual contributions to the RPP are set out in the RPP and are XXXXXXXXXX% of a Member's Earnings up to the YMPE plus XXXXXXXXXX % of the Member's Earnings in excess of the YMPE.
4. The Act and the Regulations as applicable to registered pension plans, limits the amount of employer and employee contributions that can be made to a registered pension plan. In consequence, the RPP provides that, notwithstanding the contribution provisions described in 2 and 3 above, total contributions to the RPP in a year will not exceed the lesser of:
(a) the "money purchase limit" for the year as defined in subsection 147.1(1) of the Act; and
(b) 18% of the Member's Earnings for the year.
5. Notwithstanding 4 above, if Employer and Member contributions made to the RPP in a year exceed the limits described in 4 above, they will be paid to the Member, subject to the approval of the Superintendent. To date, no excess contributions have been made to the RPP and no excess contributions will be made in respect of any Member of the Plan.
6. The Employer wishes to attract and retain employees and in order to do so has decided to implement, as part of the benefit package to be offered, a defined contribution pension arrangement that consists of the Employer's RPP and, where the contributions offered will exceed the contribution limits for registered pension plans, the Plan.
Proposed Plan
7. The Employer proposes to establish the Plan for the benefit of all Members in the RPP that are affected by the limits on contributions to the RPP.
8. Subject to the receipt of an advance income tax ruling, the Plan will be established with effect from XXXXXXXXXX (the "Effective Date").
9. The primary purpose of the Plan is to provide supplemental pension benefits in addition to the benefits provided under the RPP.
10. Subject to 12 below, each employee who contributes to the RPP at any time after the Effective Date of the Plan will become a Member as of the first day of the first biweekly pay period (the "Contribution Period") in the calendar year in which the aggregate of the contributions to the Pension Plan by the Member and by XXXXXXXXXX, first equals or exceeds the maximum annual amount prescribed under the Act.
11. The Employer may make special arrangements for the continuance of participation in the Plan by Members on leave of absence. The Employer will continue to make bi-weekly contributions during pregnancy and parental leave, worker's compensation absence for up to one year and absence while in receipt of a short-term or long-term disability benefit under an Employer-sponsored plan.
12. Notwithstanding any other provision of the Plan, the Employer will decide which employees become Members.
13. The Employer will determine the credit (the "Supplemental Credit") under the Plan for a Member for each Contribution Period in which the Employer's contribution to the RPP for the Member for that Contribution Period, as determined in accordance with 3 above, is reduced or eliminated as a result of the application of the maximum annual limit, as described in 4 above, on the aggregate of the contributions by the Member and the Employer. Subject to the receipt of an advance income tax ruling, Supplemental Credits for Contribution Periods beginning after the Effective Date and ending prior to the receipt of the advance income tax ruling will be determined.
14. The amount of the Supplemental Credit for a Contribution Period will be equal to the amount computed as described in 3 above, less the amount actually contributed by the employer to the RPP.
15. All Supplemental Credits will be credited each Contribution Period to the Members' credit in a "Supplemental Account". Subject to the receipt of an advance income tax ruling, Supplemental Credits for Contribution Periods beginning after the Effective Date and ending prior to the receipt of the ruling will be credited to each Member's Supplemental Account.
16. The Supplemental Account of each Member will be maintained until all payments to which the Member is entitled under the Plan have been made. The Supplemental Account will be adjusted at the end of each Contribution Period by the application of the rate of return earned for that Contribution Period on the investments held for the purposes of the Plan, less the percentage attributable to the expenses incurred with respect to the Plan for that Contribution Period (the "Adjustment Factor").
17. After the Member has retired, been terminated, or died, the Supplemental Account shall be adjusted at the end of each month by adding or deducting the amount determined by application of the Adjustment Factor for that month to the Member's Supplemental Account; and by deducting any payments made to the Member in the month. No Supplemental Credits will be credited to the Member's Supplemental Account for periods subsequent to the Member's retirement, termination or death.
18. The Supplemental Accounts will be a general liability of the Employer.
19. For each Contribution Period during the existence of the Plan, the Employer will set aside and invest sums of money equal to the aggregate amounts credited for that Contribution Period to all of the Supplemental Accounts of the Members. The Employer will be the sole legal and beneficial owner of all assets set aside for the purposes of the Plan, and the assets will remain the sole property of the Employer. The assets held for the purposes of the Plan may be commingled with other assets of the Employer. No asset will be set aside or earmarked in the name of a Member and no Member will have any direct claim against any asset held for the purposes of the Plan. All assets held for the purposes of the Plan will be available for the general creditors of the Employer.
20. "Member's Entitlement" means an amount equal to the balance in the Supplemental Account of the Member on the date of the first payment made pursuant to the terms of the Plan to the Member (as described in 21 to 29 below) or to a beneficiary, adjusted in accordance with the terms of the Plan as described in 16 and 17 above.
21. No entitlement will be payable under the Plan before the earliest of a Member's date of retirement (including early retirement), date of termination of employment or date of death.
22. A Member may designate in the form and manner required by the Employer, a person (the "Beneficiary") to whom, in the event of the death of the Member, entitlements under the Plan will be paid in accordance with the Plan. A Member may revoke or alter such a designation at any time.
23. Subject to the terms of the Plan as described in 24 below, the Employer will pay the Member's Entitlement to the Member in annual instalments over a period of XXXXXXXXXX years unless the Member's Entitlement is less than $XXXXXXXXXX , in which case the Employer will pay the Member's Entitlement in a lump sum.
24. If the Member's Entitlement is $XXXXXXXXXX or more, the Member, or if the Member dies before retirement or termination, the Beneficiary, may elect:
(a) to receive the Member's Entitlement in annual instalments over a period of fewer than XXXXXXXXXX years, or in a lump sum; or
(b) to defer the payment of the lump sum or the commencement of the annual payments to a date not later than the first day of the month following the Member's XXXXXXXXXX birthday (in the case of a deceased Member, assuming the Member survived until such date).
An election for the purposes of this paragraph must be made by a Member in the form and manner required by the Employer, before the date of retirement or the effective date of termination of employment, as the case may be, or by a Beneficiary before any payment of the Member's Entitlement.
25. The amount of each annual payment to a Member will be the quotient obtained by dividing the balance in the Supplemental Account of the Member at the end of the month immediately preceding the payment, by the number obtained when the number of years for which payments have previously been made to the Member is subtracted from the number of years over which annual payments are to be made.
For example, if payments are to be made over a period of XXXXXXXXXX years, the first payment will be the quotient obtained by dividing the balance in the Supplemental Account by XXXXXXXXXX; the second payment, by dividing by XXXXXXXXXX, the third payment, by dividing by XXXXXXXXXX, the fourth payment, by dividing by XXXXXXXXXX, and so on.
26. Lump sum payments will be made or annual payments will commence on the later of the first day of the month following the date on which the Member retires, terminates or dies, or a later date as elected by the Member or the Beneficiary. Succeeding annual payments will be made on the anniversary date of the first payment.
27. Notwithstanding the terms of the Plan described in 26 above, if a Member terminates before age XXXXXXXXXX and elects to receive annual payments, the earliest commencement date for the annual payments will be age XXXXXXXXXX.
28. If a Member, who has retired or terminated, dies before receiving all of the Member's Entitlement, the Employer will pay the remainder of the Member's Entitlement to the Beneficiary, in the same manner in which it was payable to the Member.
29. If a Member has not designated a Beneficiary under the Plan or if the Beneficiary has predeceased the Member and no alternate Beneficiary is eligible to receive a benefit on the death of the Member, the Employer will pay the Member's Entitlement to the Member's estate as a lump sum.
30. The Employer will administer the Plan. The Employer may appoint such agents and employees as it deems necessary to assist in managing and administering the Plan and may make arrangements and agreements with such financial institutions or agencies as it deems advantageous or necessary to hold assets set aside for the purposes of the Plan on behalf of the Employer, to prepare annual statements for each Member setting out the amounts added to and deducted from the Member's Supplemental Account and informing the Member of the status of the Member's participation in the Plan, to administer the payment of Members' Entitlements and to do such other things that the Employer in its discretion determines is desirable or advantageous to be done by such an institution or agency.
31. For the purposes of the definition of the Adjustment Factor, costs incurred in the management and administration of the Plan will be all costs, charges and expenses incurred in connection with the administration of the Plan, including fees and expenses for audit and actuarial services and the fees and expenses payable that are attributable to investments made pursuant to the Plan as described in 19 above and shall be paid by the Employer. The Employer at its sole discretion may direct that the costs be paid from the investments described in 19 above.
32. The Employer may at any time supplement, modify, amend or terminate this Plan, provided that no such supplementation, modification, amendment or termination shall affect the entitlement of any Member accrued under this Plan prior to the effective date of such supplementation, modification, amendment or termination. Any supplementation, modification or amendment of the Plan will meet the requirements of the provisions of the Act applicable from time to time. Notwithstanding the foregoing, any supplementation, modification or amendment of the Plan shall be such that the Plan will continuously meets the requirements of the provisions of the Act on which the rulings in A. through E. below are provided.
Purpose of the Proposed Plan
33. The purpose of the proposed Plan is to provide retirement benefits through the Employer's RPP and the Plan, which are adequate and competitive with similar professions and locales. The proposal will establish and maintain the Plan for Members to provide pension benefits in addition to those that will be available under the RPP. The Plan is designed to provide additional benefits, as if there were no contribution limit, to those members whose level of earnings would otherwise result in contributions, which exceed the limits under the Act for registered pension plans.
34. To the best of your knowledge, none of the issues involved in this ruling are:
i) in an earlier return of the Employer, a Member, or any person related to the Employer or a Member;
ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Employer, a Member, or any person related to the Employer or a Member;
iii) under objection by the Employer, a Member, or any person related to the Employer or a Member;
iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; nor
v) the subject of a ruling previously issued by the Directorate to the Employer.
Rulings
Provided the preceding statements constitute a complete disclosure of all relevant facts, the proposed Plan and the purpose of the proposed Plan, and provided the Plan is established as proposed, 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. No amount will be included in the income of a Member under subsection 5(1) of the Act, paragraph 6(1)(a) or subparagraph 56(1)(a)(i) of the Act as a result of, in and by itself, the Member's participation in the Plan.
D. Each payment made by the Employer under the Plan to a Member, his or her Spouse, or Beneficiary, as the case may be, will be included in the income of the recipient in the year received, as a superannuation or pension benefit, pursuant to subparagraph 56(1)(a)(i) of the Act.
E. Subsection 12(4) of the Act will not apply to a Member in the Plan to require any amount to be included in computing the Member's income for a year as interest in respect of any entitlements the Member may have under 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 70-6R4 dated January 29, 2001, and are binding on the CCRA Agency provided that the Plan is implemented by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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